FASB Proposal Addresses Valuing Alternative Investments
June 17, 2009
On June 8, 2009, the Financial Accounting Standards Board (FASB) issued for public comment a proposed FASB Staff Position (FSP) on applying FASB Statement 157, "Fair Value Measurements" to interests in alternative investments. The proposed FSP would amend statement 157 and provide application guidance for investment companies that calculate net asset value per share in accordance with the AICPA Audit and Accounting Guide, "Investment Companies." Comments are due to FASB by July 8, 2009.
The proposed FSP 157-g would not apply to investments with readily determinable fair values. Readily determinable fair values are available on a securities exchange registered with the Securities and Exchange Commission (SEC) or on over the counter markets or exchanges from a registered quotation system. The proposed FSP applies to investments that are not listed on national exchanges or qualifying over-the-counter markets. Examples of these types of investments, called alternative investments, include hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and fund of funds.
Reporting fund managers and investors responsible for these types of instruments commonly estimate the fair value of the investment using its net asset value (NAV) per share. The NAV is calculated in accordance with the investment companies audit and accounting guide. The economic climate over the past several months has either directly or indirectly led some investors to impose assorted entry and redemption restrictions on various alternative investments. Such restrictions have led many to question the soundness of NAV as the most accurate measure of fair value. In response, FASB constituents, including NACUBO, asserted that such factors as: the strategic long-term intent to hold such investments; the protection lock-up provisions may offer against non-essential sales; the realities of a limited hypothetical market of buyers; the ambiguity around the types of features that might warrant an adjustment to fair value; and, as a practical matter, applying such ambiguity to huge numbers of diverse investments in a long term portfolio could make anything other than NAV a less desirable proxy for fair value. Further, financial statement users expressed concern that subjective adjustments to NAV might lead to less than useful information.
Considering the summary in the preceding paragraph, the FASB decided that a reporting entity should be permitted to estimate the fair value of an alternative investment using NAV per share if NAV is determined in accordance with the investment audit guide as of the reporting entity's measurement.
The proposed FSP also would require additional disclosures intended to reveal the nature and risks of the investment. Independent higher education institutions and the not-for-profit foundations affiliated with public institutions would have to disclose the following for alternative investments (investments within the scope of the proposed FSP):
- The fair value of the investments determined using NAV and related significant investment strategies
- The remaining life estimate of finite lived investments
- Amounts of unfunded commitments related to its investment(s)
- The terms and conditions upon which the investor may redeem its investment
- Existing circumstances in which an otherwise redeemable investment might not be redeemable and a related best estimate of when such a restriction might lapse
- Any other significant restriction on the ability to redeem or sell the investment at the measurement date
NACUBO encourages independent institutions and not-for-profit foundations with alternative investments to read and comment on the proposal by July 8, 2009. The proposed FSP can be found on FASB's website.
You can also inform NACUBO's comments by contacting Sue Menditto, director, accounting policy.
Staff Resource: Sue Menditto, director, accounting policy
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