Larsen clarifies IPEV’s approach to DLOM

BVWireIssue #112-1
January 4, 2012

As a current member of the IPEV Board as well the FASB’s Valuation Resource Group, David Larsen (Duff & Phelps) offers five points to clarify any confusion surrounding the use of marketability discounts for financial reporting purposes, in general, and the content of the IPEV valuation guidelines, in particular:

  1. The IPEV guidelines provide best practices for estimating the fair value of private equity and venture capital investments for financial reporting, consistent with applicable accounting standards including FASB ASC Topic 820 and historical IFRS. “The IPEV Board expects to make minor changes to the IPEV Valuation Guidelines in 2012 to account for wording changes reflected in IFRS 13,” Larsen reports. “No conceptual changes are expected.”
  2. ASC 820 defines an orderly transaction as one that assumes exposure to the market for a period before the measurement date to allow for customary marketing activities. Thus, “it is not appropriate to add an ‘on top’ discount to account for the time required to market the asset, as that time has already theoretically passed, culminating with the theoretical sale on the measurement date,” Larsen says.
  3. The IPEV’s FAQ (question 15) responds to those who were confused about whether or not an “on-top” discount for marketability was needed. The IPEV guidelines “do not provide a one-size answer” for estimating the fair value of private equity and venture capital investments, Larsen says, and analysts should read the FAQ in conjunction with the complete guidelines along with the facts and circumstances of any case.
  4. Section 3.4 of the IPEV guidelines clearly states that analysts must account for specific features of an investment (such as control, non-control, liquidity, etc.) when using a market multiple approach to estimate its fair value. “Most importantly,” Larsen observes, “when using a ‘multiple’ to estimate value, analysts must calibrate it for differences between the subject investment and the comparable companies from which the ‘multiple’ is derived.”
  5. The IPEV guidelines are consistent with U.S. and international GAAP, which do not permit an “on top” discount for time to market an investment, Larsen notes. The valuation guidelines do not discuss a pro rata DLOM, but focus on the characteristics of an individual investment and methodologies that may apply to estimate the amount a market participant would pay in an orderly transaction on the measurement date.
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