CFO/GC Deep Dive

Breakfast Sponsor Closing Reception

AICPA PE-VC Task Force Update

Tim Curt, Warburg Pincus (NVCA Board Member)David Larsen, Duff & Phelps

Task Force Mission

Task Force objectives are —

• Harmonize the diverse views of industry participants, auditors and valuation specialists

• Produce a more user friendly guide with examples that can be used to reason through real situations faced by valuation specialists and auditors

Working title:

• Determining Fair Value of Portfolio Company Investments of Venture Capital and Private Equity Firms and other Investment Companies

Why a New Accounting & Valuation Guide?

Concerns

• Diversity in practice contributes to fair value measurements that are not consistent or comparable between investment companies year-over-year

• Increased PCAOB and SEC scrutiny have put pressure on the industry and the audit firms to provide better support for valuation conclusions

Industry Assumptions vs. U.S. GAAP/IFRS Fair Value

• Investors typically are most focused on the ultimate exit for an investment; however, fair value focuses on market participant assumptions in an assumed transaction on the measurement date

• Conceptually challenging to reconcile market participant assumptions and investment objectives

Current Resources

• Cheap Stock Guide (June 2013), focused on equity securities issued as compensation

• IPEV Valuation Guidelines (December 2012), focused on later stage controlling investments; deferred discussion of enterprise-value allocations

• AICPA Audit and Accounting Guide: Investment Companies, which is focused primarily on accounting and auditing

• AICPA Investment Companies TPAs (TIS 6910)

• PEIGG – U.S. Private Equity Valuation Guidelines

Co-chairs► Mark Hayden (Deloitte)► Sean McKee (KPMG)

Valuation Specialists► Travis Chamberlain (CLA)► Massimo Messina (GT)► Amanda Miller (EY)► Ray Rath (Globalview)

Auditors► Dale Thompson (BDO)► Belanne Ungarelli (PwC)

Industry Participants► Scott Burger (KPCB)► Timothy Curt (Warburg)► Dan Iamiceli (Flag Capital)► Quintin Kevin (Adams Street)► David Larsen (IPEV, Duff & Phelps)

Task Force Members

Projected Time Line

Mar 2013 Mar 2013 — Mar 2014

Mar 2014 — Apr 2016 Spring 2016 Summer 2016

Outline► Developed

consensus on topics to be covered in the Guide

► Received FinREC approval

Strategy► Subgroups tackle

specific topics; full TF reviews

► Work through examples to build consensus

Initial topics addressed:► Unit of account and

the assumed transaction

► Market participant assumptions

Coordination► Periodic meetings► Frequent callsStrategy► Subgroups tackle

controversial topics► AICPA staff and TF

members draft the guide

Objective► FinREC’s mission

is to determine AICPA’s technical policies regarding financial reporting standards and to improve financial reporting

► FinREC reviews and approves all financial reporting aids, guides, etc. and proposals thereof

Comments► All stakeholders

invited to comment

► Task Force analyzes all comments and modifies the Guide as necessary

► Revised guide is reviewed and approved by FinREC for final issuance

1. Approve Outline

3. Drafting4. FinREC

review/appr.2. Establish Framework

5. Issue proposal

Outline

0. IntroductionA. Purpose & scope – focused on Portfolio Company Investments of Private Equity, Venture Capital and other

Investment CompaniesB. Existing body of knowledge

I. Fair value and relevant conceptsA. U.S. GAAP and other sourcesB. Best practices

II. Overview of the Industry and its Investment Strategies

III. Market participant assumptionsA. Industry participantsB. How investments are evaluatedC. Holding period and exit strategiesD. Pricing, risk, illiquidity

Outline (continued)

IV. Determining the Unit of Account and the Assumed Transaction for Measuring the Fair Value of Investments

A. ASC 946 definition

B. ASC 820 “economic best interest” and “maximizing value” concepts

C. Level of control considerations

D. Examples– 100% of equity held within a single fund (single reporting unit)– 45% of equity held in each of two funds managed by the same GP– Club Deal, 30% of equity held in each of three funds with different GPs– Entity with large unused NOLs– Debt and equity held within a single fund under the same GP– Debt and equity held in different funds under the same GP– Equity or Debt Investment with Options/Warrants– Multiple Investments in different classes of Equity (Series A, B, C, etc.)– Private Investment in Public Equity (PIPE)

Outline (continued)

V. Overview of valuation approaches and methodsA. Market, income, and asset approaches

VI. Valuations of equity and debt in simple capital structuresA. Typical pricing methods and calibration

B. Enterprise value as a starting point

C. Updating fair value measurement in the absence of recent transactions

D. Common pitfalls

VII. Valuations of equity and debt in complex capital structuresA. Typical pricing for complex investments

B. Impact of differing rights and privileges

C. Allocating equity value

D. Common pitfalls

VIII. Control and marketability

Outline (continued)

IX. Calibration

X. Transaction CostsA. Impact at initial recognition and when exit is imminentB. Accounting for transaction costsC. Examples

XI. Special SituationsA. Options, warrants, contingent consideration, PIPEsB. Pre-revenue companiesC. Distressed situationsD. Rights and privileges not enforced

XII. AppendicesA. Case studies – Investment Summaries and Valuation ExamplesB. Checklists

Determining the Unit of Account and the Assumed Transaction for Measuring the Fair Value of Investments

• ASC 820 “assumed transaction” for measuring fair value is an exit from the investment on the measurement date– But transactions at intermediate dates rarely happen!

• Establish a framework that makes sense for the industry– How does the requirement under FASB ASC 820 to measure fair value based on an assumed sale or

transfer of the Fund’s investment on the measurement date consider market participant assumptions regarding the way that value is expected to be realized from the investment?

– How does the fair value measurement under FASB ASC 820 take into account the strategy that market participants would use to maximize value from the investment, considering their economic best interest?

• Status– TF established principles and applied them to examples– Draft chapter submitted to FinREC for review

Market Participant Assumptions

• Set context for measuring fair value – frame conversations considering the industry perspective:– What characteristics do market participants consider when evaluating portfolio company investments?

– How do market participants establish their required rate of return, considering the risks and illiquidity of the investment?

– How do market participants consider the expected holding period and the possible ultimate exit strategies for the investment?

– What information do market participants require when evaluating an investment? How do investors make decisions when less than perfect information is available?

• Status– Several case studies based on real-world examples developed to ensure coverage of many different industries, types

of investments, investment and exit strategies – follow each investment from issuance to exit– Primary topic of recent in-person TF meeting (May 2014)

Summary

• AICPA PE/VC Task Force mission is to promote consistency and build consensus among stakeholders from industry, audit and valuation

– Leverage existing guidance to the extent possible, but recognize the gaps – Provide industry participants, auditors and valuations specialists with a one‑stop resource

• Looking to issue a working draft for comments in 2016

CFO/GC Deep Dive

Networking Break Until 10:45 a.m.

CFO/GC Deep Dive

Closing Reception Sponsored by SRS|Acquiom