International accounting and valuation standards

1
International accounting and valuation standards
convergence or divergence?
2
IFRS the basics
1967 In February 1967 the Accountants
International Study Group (AISG) was formed to
explore the formation of international accounting
standards. 1973 In June 1973 the International
Accounting Standards Committee (IASC) came into
existence. 1997 The Standing Interpretations
Committee (SIC) was established in 1997 to
consider contentious accounting issues that
needed authorative guidance to stop widespread
variation in practice. 2001 The International
Accounting Standards Board (IASB) is established
to work on international financial reporting
standards (IFRS). 2002 U.S. and international
standard-setters issue the Norwalk Agreement to
make their current rules compatible. 2002 The
European Union (EU) announces its member states
must use IFRS for their 2005 financial
statements. 2003 SEC issues concept paper on
acceptability of international accounting
standards. Sources ICAEW, FASB and CFO Magazine
3
IFRS the basics
2005 SEC releases a road map for allowing IFRS
filings without GAAP reconciliation for foreign
firms by 2009 (or earlier). 2006 The IASB and
FASB agree to work on all major projects
jointly. 2007 SEC announces IFRS will be
recognized in the U.S. within two years as part
of an agreement with the EU. 2008 The SEC
mapped out a proposed timeline for moving U.S.
companies to IFRS. 2009 The IASB will end its
moratorium for when companies need to adopt its
new accounting standards. 2011 The earliest
that accounting firms and U.S. multinationals
estimate large U.S. companies could begin to use
IFRS rather than GAAP. Canadian, Indian, and
Japanese companies are slated to begin using the
global standards. 2013 The earliest projection
by accounting firms for mandating that U.S.
companies convert their financials to IFRS, with
2015 being the first year smaller companies could
follow suit. Sources ICAEW, FASB and CFO
Magazine
4
Conversion or divergence?

• IPEV clearly targets conversion
• Goal is to have unified reporting standards for
  private equity
• Extension of the board to include U.S.
  practitioners as well as accountants that are
  close to FASB and other regulatory bodies
• Discussions with U.S. and EU regulators ongoing
  to drive conversion

5
Conversion or divergence?

• Push from private equity investors for unified
  valuation standards
• Better comparability of performance
• Simplification of reporting to their stakeholders
• Facilitation of more active secondary markets
• Simplication of audits for global PE investors

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What are the critical differences between IFRS
US GAAP?1 Consolidations
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How was the European adoption of IFRS received by
the Private Equity Industry?
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There is a strong resistance against convergence
with IFRS as far as the investment fund industry
is concerned. In regards to the consolidation
issue in particular an individual noted there
are significant operational and cost
ramifications arising from its application.
there is a strong resistance against convergence
with IFRS as far as the investment fund industry
is concerned and in regards to the
consolidation issue in particular noted there
are significant operational and cost
ramifications arising from its application.
9
Consolidation (IAS 27)

• IPEV opposes consolidation aspect of assets in
  private equity fund reporting as in IAS 27
• Discussions with regulators in progress
• EVCA has provided a detailed case study to the
  IASB as well as the EFRAG to show the negative
  effects of consolidation of portfolio companies
  in reporting
• EVCA, BVCA as well as ILPA are in discussions
  with IASB and have expressed concern
• EVCA in continued discussions with European Union
  to exempt PE funds from consolidation under IAS
  27 and allow reporting under IAS 39 (reporting of
  individual company fair value)
• Discussions with IASB have not resulted in an
  exemption yet. End of March there will be another
  consultation appointment (exemption under US GAAP
  has been granted until language in AICPA SOP 60
  is finalized)

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What alternatives are there to IFRS adoption?
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Peer review what are GAAP are privately held UK
Private Equity houses following?
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A UK subsidiary of US PE Fund with over 1bn
under management
13
A private equity secondaries fund with
approximately 8 billion under management
14
A UK Venture fund
15
a leading global private equity and investment
advisory firm
16
A private equity fund manager based in London
with resources of 1 billion
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a leading global private investment firm with
over 7.5 billion of capital under management
18
one of the first private equity fund-of-funds
investing in venture, buyout, and mezzanine and
distressed markets in the U.S., Europe, Asia
Pacific, and emerging markets
19
a well established private equity firm operating
in the UK mid-market for over 20 years
20
A European buyout fund that manages funds with
capital commitments totalling approximately 3.0
billion
21
A venture capital firm working on behalf of
institutional and private investors
22
a leading Private Equity group, with offices in
the UK and France and more than 2 billion of
funds under management
23
A leading private equity firm focused on the
consumer sector led the investment of over 4
billion of equity
24
a leading private equity investor in the
European mid-market
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PE valuations decline with delay and in stages
after a public market shock
One to two months delay due to reporting cycle
Private equity, (diversified portfolio)
Aggressive write down by some funds, over two
quarters
End point historically higher
Public equity
Step change down
Start of down turn
Start of recovery
Source Capital Dynamics
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Historic pattern of PE NAV development
Appreciation/depreciation as percent of NAV
30.9
2008 loss of 49 for SP 500
Max. loss of 49 for SP 500
26.9
26.1
17.9
15.4
10.6
-8.8
-8.5
-12.4
?
2000
2001
2002
2003
2004
2005
2006
2007
2008 YTD
Years
YDT, as of December 2, 2008 reflecting a
mixture of June and September reports
Source Capital Dynamics analysis based on the
performance of 425 funds across strategies and
geographies
27
Other ramifications of IFRS conversion
28
Questions?