AICPA offers valuation guide for private equity and VC firms

The American Institute of CPAs has released a valuation and accounting guide for private equity and venture capital firms to help them determine the fair market value of the companies in their investment portfolios.

The guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies, offers nonauthoritative guidance and examples for preparers of financial statements, independent auditors and valuation specialists about the accounting for and valuation of portfolio company investments held by PE and VC firms. The goal is to harmonize the views of industry participants, auditors and valuation specialists within the scope of the Financial Accounting Standards Board’s ASC 946, Financial Services—Investment Companies (including private equity funds, venture capital funds, hedge funds and business development companies).

“This guide will provide these professionals with a common language understanding about how to value portfolio company investments,” said AICPA senior manager Yelena Mishkevich in a statement.

This guide explains accounting and valuation issues such as unit of account, transaction costs, calibration, the impact of control and marketability, and backtesting to help investment companies deal with the challenges of estimating the fair value of their investments. It can also be used by non-investment companies, such as corporate venture capital groups or pension funds, although it doesn’t deal with them specifically. The guide includes 16 case studies that can help guide readers through various types of scenarios encountered by investment fund managers, valuation specialists and auditors.

“Professional judgment plays such an important role in the valuation of private equity and venture capital investments, and, as a result, it is one of the core concepts addressed and illustrated throughout the guide,” stated Mark O. Smith, AICPA senior manager of forensic and valuation services.

The guide was developed by the AICPA PE/VC Task Force, which includes members from the private equity and venture capital sector, along with auditors, valuation practitioners and AICPA staff.