The FAS 157 Train: an analogy that won’t stop

Catching up on some overdue summer reading, I picked up the June issue of the Venture Capital Journal (VCJ) to read about the latest from Tuck’s Center for Private Equity and Entrepreneurship. Some interesting trends jump out of a survey recently conducted by professors Blaydon and Wainwright, which are confirmed by Arcstone’s own anecdotal experience.

Boiled down, we continue to hear this subtitle to everyone’s assessment of FAS 157: “the train has left the station.” Indeed, so it appears to us as well. In the words of the VCJ, “the reality of FASB pronouncements and auditor pressure is making most GPs adopt” Fair Value portfolio valuations. Couple this auditor scrutiny with a drive among LPs for greater transparency and you get widespread GP compliance. That’s exactly with the Tuck numbers report.

Two issues highlighted in the Blaydon/Wainwright study are worth calling out:

1. A full 20% of respondents to the Tuck survey “provide their LPs with ‘side schedules’ that contain… valuation estimates that differ from audited financial statements.” Yet at Cooley’s Private Equity CFO conference in Beaver Creek this summer, we heard veteran auditors from one Big Four firm state clearly for the record that any VC or PE firm that produces such a side schedule would not receive an unqualified audit opinion. My guess is that next year this 20% figure will fall significantly.
2. Nearly 90% of respondents “did not use third party valuation services” to conduct or consult in the valuation of their funds. I’m not going to venture into self-serving territory here. But I will say that there are well-founded opinions on both sides of this one. If you happen to be in San Francisco on November 7, you may get a chance to see some sparks fly over this very topic, among others.
(Join us, it’s going to be a hoot.)

Overall, I’d say the VCJ article is a good, quick survey indicating what’s apparent to us anecdotally. FAS 157 is now being adopted by some of its staunchest detractors.

Venture Capital Journal, June 2007 issue.