News & Analysis

IASB to consider value of 'control'

International accounting standards may become more popular with private equity firms following planned IASB proposals to account for the value of control when measuring fair value.

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The International Accounting Standards Board's (IASB) wants GPs using international reporting standards to take into account the value of control when measuring the fair value of assets. 

Draft amendments on the topic are expected to be published later this year, and will have a comment period of four months, PE Manager learned following a recent IASB board meeting.  

The changes, alongside IASB's move away from requiring consolidated financial statements, would bring the IASB more in line with US accounting standards, leading some market sources to speculate that some EU-based firms currently favoring US accounting standards may move to international standards which are more local. 

As it currently stands private equity firms using IFRS 10 Consolidated Financial Statements value a single share and then multiply that value by the percentage of their stake. For instance if a firm owns 90 percent of a company then the value of a single share is then multiplied by the 90 percent equity stake. But critics of this accounting rule argue that calculation process doesn’t necessarily account for the value associated with control and size of the position.

“The market understands there is value in owning 80 percent of a company compared to a single share because you have greater influence over the company’s management and decision making process,” IPEV Board member David Larsen of Duff & Phelps explained to PE Manager in a previous interview.

The amendments to IFRS 10, which also addresses the consolidation issue, would allow private equity firms to measure an asset's “unit of account” as a whole rather than as individual shares.

The IASB's changing attitude towards the value of control has added to the appeal of the IFRS standards, but only if they happen in tandem with changes to consolidation, according to market sources. 

“A big reason for not using IFRS up to now was that they would have had to consolidate, not fair value, their investments,”said Hilary Eastman, who recently left the IASB to work at valuation specialist Duff & Phelps. GPs were required to roll up their portfolio companies into one jumbled financial statement under consolidation rules. This requirement to consolidate will be gone as of January 2014.