New GASB fair value rules may impact PE

New fair value guidance issued by GASB may prompt public pension plans to demand timelier reporting from private fund managers. 

The Governmental Accounting Standards Board (GASB) released final guidance for measuring fair value this week. The guidance may push public pension plans – the buyout industry’s biggest source of capital and pacesetters for best practices in the LP community – to require more timely and rigorous reporting from GPs.

The guidance is, in many ways, a simpler copy of the Financial Accounting Standard Board’s Topic 820, which defines fair value as 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.

GASB allows users to estimate a fund’s fair value using its reported NAV per share. However, the measurement date must sync with the report date; a difficulty in the private equity industry where reports are only provided on a quarterly or semiannual basis. 

If there is a lag in reporting dates, or if some of the fund’s investments are not held at fair value, then the public pension plan “should consider whether an adjustment to the most recent NAV per share (or its equivalent) is necessary,” the guidance states.

Many LPs have already moved in the direction of more valuation due diligence, but “to have GASB carve the practice in stone could push many investors to formalize and enhance the process,” said David Larsen, managing director at financial advisory and investment banking firm Duff & Phelps. “And LPs subject to GAAP who never really gave much thought to how much trust they put in GPs’ fair value estimates will need to begin thinking about this more.”

The guidance also requires “fairly extensive disclosures” that LPs may not have had to give much thought to before, says Larsen. For instance, the disclosures require LPs to address the significant investment strategies of the investees and factors that could affect the liquidity of the investments.