Last year the AICPA (which is the representative body for the CPA profession in the US) issued working draft guidelines for the valuation of unlisted investments: “Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies.” The AICPA is currently reviewing comments received on the draft guide with the final guidance expected in May 2019.
The guide is aimed at providing more comprehensive direction to fund managers, corporates, auditors and valuers to ensure consistency in the valuation of private equity, venture capital, private credit and other unlisted investments for financial reporting purposes. For those already following best practice, there should be no surprises as the guide attempts to ensure the valuation process aligns to best practices as represented by the major accounting firms, third-party valuation providers, and buy-side industry participants that were involved in drafting the guide.
At over 650 pages, the guide does not disappoint the avid reader of valuation literature, however, for those that find this daunting, only about one-third is formal guidance, while the balance is taken up by examples and case studies. Whilst the draft guide is focused on US standards and practices, the vast majority of the guidance applies to valuation of unlisted assets more generally. For example there are chapters addressing market participant assumptions, unlisted debt valuation, valuation of complex securities, control and marketability discounts, calibration and documentation/support for the valuation.
Whilst the guide does not specifically apply to Australian companies/investors, it may serve as a useful check to ensure that companies and investors with unlisted assets are following global best practice in respect of valuation policies and processes. Also, in light of the increased investments allocations being made to unlisted assets in Australia (such as venture capital, private debt and private equity), some recent high-profile issues in fair value measurements by listed companies and ASIC’s ongoing focus on fair value measurements it is likely that auditors and/or regulators will look to this guidance when evaluating future testing and/or guidance in respect of fair value measurements.
We will continue to monitor any announcements related to the guide over coming months and will keep you up to date.