Recently, the Private Equity and Venture Capital Taskforce of the AICPA published a working draft of an Accounting and Business Valuation Guide entitled, ‘Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies.’
The Guide was developed specifically for an investment fund and venture capital fund managers, auditors, and valuation specialists. Its guidance addresses a variety of investment types, across different stages of investment and related life cycles of portfolio companies. Objectives of the Guide include identifying certain requirements under financial reporting standard ASC 820, and providing best practices guidance for financial reporting issues not specifically put forth by the FASB under ASC 820. The Guide’s fourteen chapters cover a broad range of industry-specific valuation topics and examples, while its Appendices A through C also provide case studies of practical applications for best practices.
Key Highlights of the Accounting and Business Valuation Guide Include:
- Identification of Market Participants, Strategies & Objectives of Various Investors (Chapter 3 of the Guide)
- Determining the Unit of Account & Measurement of the Fair Value of Investments, including examples involving club deals, multiple investments in various classes of equity of a portfolio company, and valuing debt and equity investments with attached warrants (Chapter 4 of the Guide)
- Valuation of Debt Instruments, including considerations involving valuing debt for the purposes of determining the value of equity investments (Chapter 6 of the Guide)
- What to consider when valuing an investment in an enterprise versus determining the fair value of the enterprise itself (Chapter 7 of the Guide)
- Valuation of Equity in Portfolio Companies with Complex Capital Structures; Selection of a Valuation Methodology for Equity Allocation, including when to consider using an Option Pricing Model (Chapter 8 of the Guide)
- Applications of Control Premiums, Marketability Discounts and Minority Discounts, and how these discounts and premiums impact calibration ( Chapter 9 of the Guide)
- The Significance of Calibration and its related applications (Chapter 10 of the Guide)
- Backtesting (Chapter 11 of the Guide)
- Factors to Consider when estimating fair value at or near a Transaction Date (Chapter 12 of the Guide)
- Special Topics, including: the use of Pricing Services, Broker Dealer Quotes, Entities with publicly traded securities, the valuation of equity interests in early stage companies with no recent financing round, and considerations related to use of NAV and the Practical Expedient (Chapter 13 of the Guide)
- Frequently Asked Questions (Chapter 14 of the Guide)
- Valuation Case Studies (Appendix C of the Guide), with illustrative examples involving various types of investments (both equity and debt instruments), including examples relevant to venture capital investments (as illustrated in case studies 8 through 12)
- Valuation Process and Documentation Considerations (Appendix A of the Guide)
Please note that the guidance provided in this Guide does not supersede the guidance put forth in the AICPA Practice Guide, “Valuation of Privately Held Company Equity Securities Issued as Compensation.” If you have any questions, please reach out to a member from our financial services team.
Key Highlights of the Accounting and Business Valuation Guide Include:
- Identification of Market Participants, Strategies & Objectives of Various Investors (Chapter 3 of the Guide)
- Determining the Unit of Account & Measurement of the Fair Value of Investments, including examples involving club deals, multiple investments in various classes of equity of a portfolio company, and valuing debt and equity investments with attached warrants (Chapter 4 of the Guide)
- Valuation of Debt Instruments, including considerations involving valuing debt for the purposes of determining the value of equity investments (Chapter 6 of the Guide)
- What to consider when valuing an investment in an enterprise versus determining the fair value of the enterprise itself (Chapter 7 of the Guide)
- Valuation of Equity in Portfolio Companies with Complex Capital Structures; Selection of a Valuation Methodology for Equity Allocation, including when to consider using an Option Pricing Model (Chapter 8 of the Guide)
- Applications of Control Premiums, Marketability Discounts and Minority Discounts, and how these discounts and premiums impact calibration ( Chapter 9 of the Guide)
- The Significance of Calibration and its related applications (Chapter 10 of the Guide)
- Backtesting (Chapter 11 of the Guide)
- Factors to Consider when estimating fair value at or near a Transaction Date (Chapter 12 of the Guide)
- Special Topics, including: the use of Pricing Services, Broker Dealer Quotes, Entities with publicly traded securities, the valuation of equity interests in early stage companies with no recent financing round, and considerations related to use of NAV and the Practical Expedient (Chapter 13 of the Guide)
- Frequently Asked Questions (Chapter 14 of the Guide)
- Valuation Case Studies (Appendix C of the Guide), with illustrative examples involving various types of investments (both equity and debt instruments), including examples relevant to venture capital investments (as illustrated in case studies 8 through 12)
- Valuation Process and Documentation Considerations (Appendix A of the Guide)
- Please note that the guidance provided in this Guide does not supersede the guidance put forth in the AICPA Practice Guide, “Valuation of Privately Held Company Equity Securities Issued as Compensation.” If you have any questions, please reach out to a member from our financial services team.
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