Why the PCC can be a fair value savior

Many CFOs were disappointed to read in a post-implementation review released last week that FAS 157, the section of accounting code that governs fair value reporting, supposedly hadn't resulted in any “unintended consequences”.

Presumably the Financial Accounting Standards Board (FASB) and other US standard-setters don't intendfor certain groups (including private fund advisors) to have their fair value estimates audited in a way that means financial statements end up stuffed with disclosure notes that are all too often meaningless to investors.

The more likely explanation is that this was primarily a 'big picture' review of the whole universe of groups covered by the standard – of which private equity and venture capital firms represent only a small subsection. And it's probably true that the standard (now known as ASC 820) is – for the most part – working as intended.

Nonetheless, when soliciting feedback on FAS 157, the review team noted that stakeholders’ opinions on the standard were more or less split between large public companies –  who had relatively few complaints – and smaller, privately-held groups, many of whom voiced frustration about the time and energy now being spent on fair value accounting. 

The report did acknowledge this – but it pinned the problem on outside forces like the US Securities and Exchange Commission, which in the case of private equity, has been signaling to auditors that GPs’ valuations need to be rigorously tested.

However, it’s the FASB that will lose credibility with the private funds industry if nothing is done to fix the problem. And unfortunately, there's been little to suggest that they plan to add this (relatively) small issue to their busy agenda any time soon. 

Happily, there’s an easy fix here. The Private Company Council was recently created to address this exact type of situation (i.e. help FASB tweak accounting rules where and when needed for private companies). And even though the post-implementation report said FAS 157 was for the most part functioning properly, it’s worth remembering that these types of reviews are evaluating the standard-setting procedure itself; they're not a recommendation for any standard-setting action. In other words, the report identified a problem for which the PCC can be a solution.

The PCC has already shown that it can work productively with the FASB: in December, the two groups agreed on a framework that will allow the former to recommend separate private company accounting standards where necessary, which subject to FASB endorsement could end up being incorporated into US GAAP. And the PCC has already been advising the FASB on improving the effectiveness of disclosure notes, a project that would dovetail nicely with some of the issues cited in the post-implementation report.

FASB chairman Russ Golden said in a statement that the board would consider the review team’s finding and provide an initial response in the coming weeks. If fair value rules are to be respected universally, that response will have to recognize the standard’s effects on everyone – both large and small.