Mission 157

As the November 15 deadline for adopting Statement No. 157 for fair value measurements nears, the US Financial Accounting Standards Board has formed a valuation resource group in an effort to assess whether and to what extent additional and more specific valuation guidance is needed for financial reporting.

Duff & Phelps managing director David Larsen was named as the private equity representative to the group. Larsen is a member and champion of the Private Equity Industry Guidelines Group (PEIGG), a voluntary alliance of private equity practitioners set up to help the industry to understand and implement FASB's fair value guidelines in the US.

Fair value, defined by FASB Statement No. 157, is ?the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.?

Larsen has often described the new fair value guidelines as ?increasing the wattage of the light bulb shining on the fair value issue. It doesn't change the need for fair value, but it will increase the visibility that fair value receives from private equity managers, investors and auditors.?

FASB's resource group consists of 25 representatives from the Big Four and small audit and valuation firms, financial services institutions and corporations. Also represented on the board are organizations including the International Valuation Standards Committee, International Accounting Standards Board, Securities and Exchange Commission, the American Institute of Certified Public Accountants and the CFA Institute.

Larsen has been actively working with Stephen Holmes, chief financial officer of InterWest Partners in Menlo Park, at PEIGG. In March this year, PEIGG updated its valuation guidelines for the US private equity industry. The updated guidelines are intended to be consistent with US GAAP and conceptually in harmony with the International Private Equity and Venture Capital Valuation Guidelines developed by the Association Française des Investisseurs en Capital (AFIC), the British Private Equity and Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) in March 2005.

The updated guidelines include the elimination of a bias to write things down more quickly than up, the fact that inside rounds of financing need to be taken into account in fair value determination, a prohibition on liquidity or blockage discounts and a prohibition on including transaction expenses in the determination of fair value, according to Larsen.

FASB's valuation resource group was formed in June. The group's first meeting is expected to be held in October 2007 at FASB's headquarters in Norwalk, Connecticut.

Carried interest consumes Capitol Hill
Capitol Hill set its sights on carried interest last month, as two separate Congressional committees held exploratory hearings on or relating to the tax rate applicable to carry in the US. While two previous hearings on the matter focused largely on whether carry is actually compensation for services and should be taxed as ordinary income, last month's Senate Finance Committee hearing explored how pension funds might be affected should the tax on carry increase. Private equity funds likely lack the clout to pass on to investors any additional costs stemming from increased taxes, said committee chairman Max Baucus, a Democrat from Montana who co-authored a separate bill proposing increased taxes on publicly traded partnerships like The Blackstone Group. Russell Read, chief investment officer for the California Public Employees' Retirement System, said he was unable to predict whether increased taxes on carried interest will affect LPs, and ultimately pensioners. Meanwhile, the topic was broached occasionally during the House Ways and Means Committee's day-long tax hearing.

GPs can offset higher taxes, says study
As the US Congress is mulling a bill that proposes changing the tax classification of carried interest, University of Pennsylvania Law School professor Michael Knoll has concluded that GPs will be able to restructure their funds to counterbalance higher tax bills. The simplest solution would be to have LPs make additional, tax-deductible payments that cover the GPs' additional tax, said Knoll in a recently released paper, ?The Taxation of Carried Interest: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income.? Knoll argued that funds could also be restructured so that portfolio companies pay carry instead of LPs, which would likely translate to a tax deductible business expense that offsets additional taxes on the GP's carry. But this structural change might not please LPs, noted University of Colorado professor Victor Fleisher, who argued that because of the levels of debt many portfolio companies take on, it is unclear how many would actually have the high effective tax rate necessary to gain the tax deductions outlined by Knoll.

PE firms view themselves as ethical, survey shows
Seventy three percent of private equity firms opine that they possess high ethical standards, according to a recently released survey from Grant Thornton, a UK-based accountancy and consultancy firm. Grant Thornton surveyed over 100 private equity executives involved in deals worth a minimum of £5 million and found an industry confident of its principals in the face of increased scrutiny from regulators and the press. Nearly half of those polled felt that the ?left wing? media was biased against them, with a third of them clarifying a handful of shops gave the industry a bad name. Many respondents felt the media focused on a few instances of bad behavior to pursue their own agenda. To the inquiry into whether their firms had an official code of conduct, 24 percent said yes and seven said they had no written code whatsoever. The survey also included a question as to whether they were ?unethical asset strippers in for a quick buck? as they are regarded in the public eye, to which only half said the statement was ?completely false.?