Another Fair Value Rule Tweak Is in the Works

This time, FASB is hoping to clarify the rules on valuing "alternative" investment vehicles.

The Financial Accounting Standards Board (FASB) is proposing another in what has become a regular series of amendments and clarifications to its landmark pronouncement, FAS 157, Fair Value Measurements. The latest amendment/clarification, issued on June 8, is in the form of a FASB Staff Position – FSP FAS 157-g, Estimating the Fair Value of Investments in Investment Companies That Have Calculated Net Asset Value per Share in Accordance with the AICPA Audit and Accounting Guide, Investment Companies.

The FSP addresses the issue of how investors should ascertain the fair value of their investments for financial statement purposes in what are popularly known as “alternative investment” vehicles. Basically, the proposal applies to investments in entities that meet the definition of an “investment company” as set forth in paragraph 1.06 of the aforementioned investment companies guide.

If issued in its current form, 157-g will affect a company’s net asset value per share that has been calculated in accordance with the guide. It also will affect the equivalent of a company’s net asset value per share – for example, partners’ capital per share for an investment in a partnership. As a result, the FSP will, in general, apply to investments in hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and funds of funds.

However, the FSP does not apply in instances in which the fair value of the investment is “readily determinable,” as described in paragraph 3 of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. For example, the FSP will not apply to an investment in a registered closed-end investment company whose fair value can be estimated using sales prices that are currently available on an exchange registered with the Securities and Exchange Commission or in an over-the-counter market (provided that, in this latter case, the prices or quotations are publicly reported by the NASD Automated Quotation system or by Pink Sheets, LLC).

Bob Willens 2“The FSP’s principal holding is that, in cases in which net asset value per share of an investment is not determinative of fair value, a reporting entity will, nonetheless, be permitted, as ‘a practical expedient,’ to estimate the fair value of an investment.”— Robert Willens

NAV Is Controlling
The FSP’s principal holding is that, in cases in which net asset value per share of an investment is not determinative of fair value, a reporting entity will, nonetheless, be permitted, as “a practical expedient,” to estimate the fair value of an investment, within the scope of this FSP, using the net asset value per share (or its equivalent such as partners’ capital per share) without further adjustment but only if such net asset value per share is determined in accordance with the investment companies Guide as of the reporting entity’s ”measurement date.”

This approach is consistent with the one recommended by a preponderance of FASB’s constituents who had been polled for their views regarding the direction FASB should take on the matter. In effect, FASB decided that net asset value per share is the “most relevant estimate of fair value available” that would not require “undue cost and effort.” In reaching this conclusion, FASB determined that the cost and effort involved in evaluating, (1) the subjective factors of the investment, including the value attributable to gaining access to a particular manager or to a particular investing “style,” and (2) any “principal to principal” or brokered transactions, would more than outweigh the benefits which might be attained from the pursuit of this mode of analysis.

The FSP is being publicly vetted during a 30-day comment period.

Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com

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