Impact of Recent Fair Value Accounting Rules on Governmental Pension Plans. Presented by Tom Heseltine, Partner . Course Objective . Discuss recent accounting guidance and their impact on alternative investments
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Presented by Tom Heseltine, Partner
Fair value is the price that would be received or paid to transfer a liability in an orderly transaction between market participants at the measurement date.The Fair Value Definition
Limited Partners in alternative investment funds need consistent, transparent information to exercise their fiduciary duty. Fair value provides such information. An arbitrary reporting basis such as cost does not allow apple to apple comparisons.
The FASB believes that, in order to be useful, accounting information should be both relevant and reliable
For all assets measured under SFAS 157:
For measurements using significant Level 3 inputs:
An active market will generally:
1) Determine whether a market is inactive by identifying how many transactions have occurred and if few what does that mean, assessing whether price quotes are current or not and determining if quotes vary dramatically from broker to broker and there are abnormally wide bid/ask prices. If these conditions exist then we go to step 2.
2) If considered inactive the fund itself is now responsible for pricing that security. This leads to several challenges.
Examples of inputs used when estimating fair value include:
A reasonable assumption is that the net asset value (NAV) of the fund and the nature and duration of the restrictions on redemption, would be significant inputs to any estimation of fair value.
In situations where there are no recent redemptions it is less clear that NAV is an appropriate measure because no transactions exist to indicate investors willingness to relinquish their investments in the fund.
Historically industry practice generally had been to carry interests at the NAV most recently reported by the investee fund manager with little or no further review of the amounts reported by the investee fund.
Recent guidance clarified this practice and requires the investor entity to undertake a robust review and understand and evaluate the NAV reported by the investee fund manager. The “exit price” concept under FASB 157 further challenges an investor entity’s decision to continue to value such investments at NAV.
Therefore the task of estimating fair value is twofold:
To assist in assessing the reliability
of the NAV reported the investor
entity should develop the following
Some factors to consider:
Factors to consider when assessing whether NAV should be adjusted:
Management is responsible for making the fair value measurements and disclosures included in the financial statements. As part of fulfilling its responsibility, management needs to establish an accounting and financial reporting process for determining the fair value measurements and disclosures, select appropriate valuation methods, identify and adequately support any significant assumptions used, prepare the valuation, and ensure that the presentation and disclosure of the fair value measurements are in accordance with GAAP.
AU Section 328.04
At a minimum, management should have sufficient understanding of:
Use of Investment Consultant – monitors the investments through analyzing investment performance, attending all advisory board meetings, attending annual meetings, ongoing communications with the partnerships and ongoing communications with other limited partners.
Document valuation procedures
Create contemporaneous and consistent documentation of valuation rationale and conclusions
“Fair value is an art, not a science.”
Questions? Process and Related Internal Control