Just in time: new FASB updates NAV of ‘alternative investments’

BVWireIssue #85-1
BVWireIssue #85-1
October 5, 2009

Due to the current complexities and practical difficulties in estimating the fair value of alternative investments—such as hedge funds, PE and VC funds, real estate and offshore fund vehicles, and fund of funds—the Financial Accounting Standards Board (FASB) has just released Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).  The amendments affect all reporting entities that hold an investment that is required (or permitted) to be measured or disclosed at fair value on a recurring or non-recurring basis, and also meet two criteria: 1) the absence of a readily ascertainable fair value; and 2) the investment’s activities, ownership, pooling of funds, and reporting functions display certain traits, described more fully in the body of the update.

The guidelines discuss current U.S. GAAP requirements regarding investment companies (Topic 946) and fair value measurements (Topic 820), and permit, as a “practical expedient,” a reporting entity to measure the fair value of an alternative investment on a net asset value (NAV), per-share basis if the calculation is consistent with GAAP standards and if it provides certain additional disclosures. This “practical expedient” reduces complexity and cost of applying Topic 820 while improving “consistency and comparability,” the summary says. The additional disclosures “enable users of financial statements to understand the nature and risks of investments” and whether the investments are likely to be sold at amounts different from net asset value per share. The new guidelines take effect for interim and annual periods ending December 15, 2009. Early application is permitted for earlier statements that have not yet been issued.

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