FAS 157 – The Eternal Sunshine of the Spotless Audit
If you are a venture capitalist and you haven’t heard about FAS 157 (also known as Fair Value Accounting), I recommend you ask your accounting firm’s audit partner about it. Today.
Until recently, most VC firms used a straightforward and consistent method to valuing their portfolio companies. No more – now we have to conform to FAS 157 to get a clean GAAP opinion from our auditors. Since our LP agreements require a GAAP opinion, FAS 157 here we come.
I received the following question by email recently: How will your firm be handling the requirement to value its investments in portfolio companies under the FAS 157 fair value standard next year? A reason I ask is that I am on a panel at an Alliance of Merger & Acquisition Advisors conference discussing this topic. The panel includes a business appraiser (me), and auditor, and a VC. Since I follow your blog, I was interested in your thoughts.
My partner Jason Mendelson has been responsible for our implementation of FAS 157 so I asked him to weigh in with an answer – which follows:
We’ve been FAS 157 compliant starting in Q3 2007. We worked alongside our auditors to determine a methodology to determine fair value for each company. We aren’t naïve enough to think this methodology won’t change, as many predict this to be a moving target at least through the first half of 2009. In short, we’ve developed a checklist of items that we review for each company every quarter. Some of the questions that we ask are:
- Has the company had a financing event during the period?
- Has the company experienced a material adverse or positive effect during the period?
- Any major sales made / missed?
- Any major deals signed up?
- Any financial results that were materially different than plan?
- How have the company’s competitors fared during the period? (Note: this is much easier with public comparables than private)
- Any acquisitions in the company’s ecosystem during the period?
- Has the company received any acquisition interest during the period?
Along with those questions, we analyze the current capitalization table, financial results and public comparable stock prices. It’s not a science – it’s an art, but one that we’ve had in place for a bit now and we are becoming more adapt to the process.
Who says VCs have all the fun?