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Overview: AICPA Guide for Investment Companies

Recently, the Private Equity and Venture Capital Taskforce of the AICPA published an Accounting Guide entitled, ‘Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies’. The purpose of this Guide is to help investment companies estimate the fair value of their portfolio company investments, consistent with market participant assumptions.

The guidance put forth by the AICPA Taskforce is considered best practices for valuation analyses performed for financial reporting purposes. Specific to venture capital and early-stage investors, the Guide addresses the selection of valuation methodologies and assumptions, since “traditional” approaches may not be appropriate for the valuation of early stage and pre-revenue stage entities.

One of the more challenging aspects of the valuation of venture and early stage entities is the selection of an appropriate methodology for allocation equity across complex capital structures. In light of this, and to proactively approach the financial reporting requirements for fiscal 2018, we have highlighted several sections of the AICPA Guide and are providing them here.
We encourage your team to review the new guidance and the related examples provided, as you plan for the fiscal 2018 audit.

Specifically, the sections of the Guide provided include:

  • Frequently Asked Questions (FAQ, Chapter 14), related to considerations for selection of methodology and assumptions for complex capital structures
  • Chapter 8 (See Paragraph 8.14 onward), “Valuation of Equity Interests in Complex Capital Structures”. This chapter outlines the guidance and criteria for the selection of an appropriate valuation and equity allocation methodology. It emphasizes the impact of a company’s stage of operations, its risk profile, and the control and economic characteristics of the different equity classes in a company’s capital structure, upon the selection of a valuation methodology.
  • Appendix C, Case Study #9 and Case Study #10 – These case studies provide detailed examples of the selection criteria, different valuation methodologies, and entire valuation analyses as described in Chapter 8. In fact, Chapter 8 references specific sections in each of these case studies.

Author: Michelle Keyes, ASA | mkeyes@withum.com

Learn 4 Key Considerations from the AICPA’s Accounting and Valuation Guide for Investors

For additional information or questions, please contact Withum’s Private Equity and Venture Capital team by filling in the form below. For more information on the AICPA Accounting Guide, visit aicpa.org

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