The AICPA Accounting and Valuation Guide was developed to provide guidance for valuation specialists, preparers of financial statements and auditors on fair value (FV) measurement of portfolio company investments. The overall objective of the guide is to provide an overview and greater understanding of the valuation process, and to offer best practice recommendations for complying with FASB “Accounting Standards Codification (ASC) 946 Financial Services – Investment Companies and ASC 820 Fair Value Measurement.”
The guidance calls for robust application of valuation methodologies and describes sophisticated techniques for supporting key inputs and assumptions and defined more-complex methodologies. Although an extensive document, the guide provides key takeaways on the following items:
- Enterprise value – best practice is to apply multiple valuation methodologies based on the facts and circumstances of the portfolio company
- Allocating enterprise value – an allocation methodology is required where an entity has a complex capital structure (i.e., multiple classes of stock with varying rights and preferences)
- Calibration – an initial model should be adjusted for changes in the market and company-specific risk occurring since the transaction date to reflect market participant assumptions as of the measurement date
- Control and marketability – both control features and the degree of marketability must be examined to determine the FV of the investment in a portfolio company
- Valuation of debt securities – the FV of debt should not simply be set equal to its face value; the most common appropriate method for determining the FV of debt is the yield method
Although non-authoritative in nature, the guide itself has been reviewed and approved by at least two-thirds of the members of the Financial Reporting Executive Committee and therefore should be considered in the valuation process.
