Comments on: FAS 157 – Another Annoying Accounting Provision

By: Brad Feld

Brad Feld — Sun, 07 Jun 2009 03:22:05 +0000

Yeah – I guess I never got around to it. It’s probably time now that a year has passed and everyone has had to go through one full FAS 157 cycle (and boy did that work out well.)

By: Auditing

Auditing — Thu, 04 Jun 2009 13:22:08 +0000

I am waiting for your next post.

By: kyle_s10731

kyle_s10731 — Wed, 07 Jan 2009 01:55:58 +0000

What is the purpose of this rule? As best I understand (IANAA), to the extent that your portfolio investments grow in value, gains aren't taxable until you actually take money off the table, which would lead me to believe there are no tax implications. I can understand why it makes sense to value derivative contracts this way, as they can have substantial impact on cash and earnings yet don't show up on a balance sheet; but venture investments are totally dissimilar from derivatives.

While funds like yours are likely to be above-board, to play by the rules, and to be as conservative as possible, IMHO it's just a matter of time before an LP sues a less-than-stellar VC for valuing their portfolio companies too aggressively (and thus creating misleading expectations about returns, causing investment in a new fund that wouldn't have otherwise happened, etc etc).

By: devinreams

devinreams — Wed, 07 Jan 2009 01:55:58 +0000

Well hmm, it's not like this was a surprise. New accounting communications such as this come out years in advance to start the discussions like these.

Not to sound snide but you might want to put IFRS on your radar if you haven't already.

By: Dean Leffingwell

Dean Leffingwell — Wed, 07 Jan 2009 01:55:58 +0000

Good post Brad.
Question, wrt to your comment "2. If a financing happens at an increased valuation and is led by a new investor, write your investment up to the new price per share."

Have you ever seen a case where an up round did NOT include a new investor?

If not, why not, and if so, how do you value that asset?

Dean Leffingwell

By: bfeld

bfeld — Wed, 07 Jan 2009 01:55:54 +0000

Yup – i have seen plenty and participated in some. Under the old methodology you wuld carry the old rounds at their previous value and the new round at cost. Under FAS 157 you have to mark everything up to the new price per share.

By: david_ulevi3244

david_ulevi3244 — Wed, 07 Jan 2009 01:55:54 +0000

It's policies like this that drive inaccurate and over-inflated valuations which ultimately force small growing businesses into unfortunate positions as they raise capital down the road. Ultimately it's the economy that suffers as a consequence.

By: bfeld

bfeld — Wed, 07 Jan 2009 01:55:54 +0000

Correct – there is no tax impact. And your interpretation is correct – there is no real reason to have to do any of this. But more in the next post.

By: luca8090

luca8090 — Wed, 07 Jan 2009 01:55:54 +0000

HA! You touched a sore spot…

A public company I work with has a convert outstanding which is very illiquid. Because of a depressed stock price and the state of debt market, the occasional small trade takes place at around 70. Since the bond trades deep under par, FAS 157 forces this company to create a significant intangible asset, to be written down over the years until the convert is due. Net results: (1) the company's balance sheet will be misleading with that asset that has no real value, and (2) net income (for those who care) will be depressed by the writedowns.

Weren't accounting rules supposed to give a clear and fair view of a company's financial situation???

By: David McCully

David McCully — Wed, 07 Jan 2009 01:55:54 +0000

Interesting post; however, your FASB criticisms are misdirected in this case. Don't feel bad… most of the media make the same mistake.

FAS 157 doesn't do or cause anything… it's simply a disclosure standard that categorizes and defines three levels of measurements of fair value. It doesn't require the use of fair value accounting at all. In fact, it doesn't even tell you how to calculate fair value for anything.

The real financial accounting standards that are causing you heartburn are ones like FAS 133, FAS 141 and others that prescribe fair value accounting.