April 2010: New Guidance On Valuing Alternative Investments

8/7/2019 April 2010: New Guidance On Valuing Alternative Investments

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Is determining the fair value and the related “level” disclosures of your Nonprot’s alternave invest-

ments a source of confusion? New guidance is here to help! In September 2009, FASB released Update

2009-12 under Topic 820, Fair Value Measurements and Disclosures, entled, “Investments in Certain

Enes that Calculate Net Asset Value per Share (or Its Equivalent). This new guidance is eecve for an-

nual periods ending December 15, 2009, and beyond.

BACKGROUND

An investor, such as a Nonprot, may invest in enes that permit the Nonprot to redeem its invest -

ments directly with the investee at certain specied mes under the investment agreement. Many of

these investments, deemed “alternave investments” do not have readily determinable fair values be -

cause these investments are not traded on a naonal exchange or over the counter market. Examples of

such alternave investments include hedge funds, private equity funds, real estate funds, venture capital

funds, oshore fund vehicles, and funds of funds.

Many of the investments (investees) provide their investors with a net asset value per share (or its equiv-

alent, for example, member units or an ownership interest in partners’ capital to which a proporonate

share of net assets is aributed).

Since the net asset value is commonly used by investors to esmate the value of the investments by

using net asset value, FASB decided to issue guidance on its use as a praccal way of esmang the fair

value of an alternave investment.

NEW GUIDANCE ON VALUING ALTERNATIVE INVESTMENTS

APRIL 2010



CRITERIA & KEY PROVISIONS

The guidance applies to all investments, as follows:

• The investment does not have a readily determinable fair value

• The investment is in an enty that has all of the following aributes specied in Topic 946 of the

Codicaon (U.S. GAAP for Investment Companies)

• Investment acvity – the enty’s primary business acvity involves invesng its assets,

usually securies, for current income, appreciaon, or both.

• Unit ownership – ownership in the enty is represented by units of investments, such as

shares of stock or partnership interests, to which proporonate shares of net assets can

be aributed

• Pooling of funds – the funds of the enty’s owners are pooled to avail owners of profes-

sional investment management

• Reporng enty – the enty is the primary reporng enty

So what does this mean?

If all of the criteria above are met, an enty is allowed, as a praccal expedient, to measure fair value

of an investment on the basis of net asset value per share (or its equivalent) as reported as of its mea -

surement date (usually its balance sheet date).

The guidance also adds disclosure requirements, as follows:

• Disclosure by major category of investment about liquidity restricons, unfunded capital commit-

ments, and investment strategies

Furthermore, the guidance also claries fair value hierarchy classicaons for alternave investments,

as follows:

• If the Nonprot has the ability to redeem (sell) its investment with the investee at net asset value

per share (or its equivalent) at the measurement date, the investment may be classied as a Level 2

investment under Topic 820 (e.g investment in a hedge fund that is redeemable).

• If the Nonprot will never have the ability to redeem its investment at net asset value, it should be

categorized as a Level 3 (e.g. non-redeemable investment in a private equity fund).

• If the reporng enty does not know when an alternave investment will be redeemable in the fu-

ture, it should be categorized as a Level 3 investment.



Stephen P. Carter - Silicon Valley

[email protected]

Lewis Sharpstone - Los Angeles

[email protected]

Je Holt - Los Angeles

[email protected]

Rob Schlener - Orange County

[email protected]

CRITERIA & KEY PROVISIONS

While the guidance is aimed primarily at alternave investments, it also may apply to other assets

represented by an ownership interest based on a proporonate share of net assets. For example, in a

benecial interest in a perpetual trust, a Nonprots ownership interest in the trust is determined by it

percentage ownership in the fair value of the underlying trust assets, which may have an underlying net

asset value.

For more informaon, or if we can be of assistance to you, please do not hesitate contact one of

SingerLewak’s Nonprot Partners:

Documents

April 2010: New Guidance On Valuing Alternative Investments