The Financial Reporting Blog

A weekly update on financial reporting topics curated by Mercer Capital’s Financial Reporting Valuation professionals

Portfolio Valuation and Regulatory Scrutiny

Over the past decade, we have been retained by several investment funds to assist them in responding to formal and informal SEC investigations regarding fair value measurement of portfolio investments. Reflecting back on those engagements yields a couple observations and reminders for funds and fund managers as they go through the quarterly valuation process.

Growing Business Development Company Field Highlights Fair Value Requirements for Investment Funds

A recent article on SNL Financial highlights the potential for an “explosion” in the number of publicly traded business development companies, or BDCs, if Congress loosens leverage restrictions historically in place. Business development companies have been a growing source of investment capital for middle market companies and dividends for yield-hungry investors. Congress is currently debating an easing of the leverage limits to 2:1, which would allow BDCs to either maintain dividend yields for investors while taking less credit risk, or increase dividend payouts with the same amount of credit risk. As a result, the contemplated changes increase the attractiveness of the BDC structure, and, if enacted, are expected to precipitate an increasing flow of new public and follow-on offerings.

Pulling the Trigger: Interim Goodwill Impairment Testing

Most financial professionals understand that goodwill impairment testing is typically performed annually. However, ASC 350 also prescribes that interim goodwill tests may be necessary in the case of certain “triggering” events. For public companies, perhaps the most common triggering event is a decline in stock price, but a variety of other factors may constitute a triggering event as described in ASC 350. For reporting units undergoing major changes, interim goodwill impairment testing provides management, auditors, and investors with some assurance that the unit’s balance sheet reflects the current expectations for the unit.

Facebook, WhatsApp, and Value Allocation

When a business announces a $16 billion transaction for a mobile messaging company that’s only been around since 2009, what are they actually purchasing? In this case, it’s Facebook acquiring WhatsApp. One of the interesting intersections between real-world M&A and accounting occurs when a company documents the purchase price allocation for a deal. In the world of fair value accounting, the purchaser is required to recognize and record the value of assets acquired in a deal. What intangible assets might Facebook ultimately record when it books the transaction? Clearly, one of the key components of value is the user base, but the accounting rules for intangible asset recognition require that the asset meet certain contractual-legal or separability criteria. Something like a user-base, in this instance, may not meet those criteria.

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