The Financial Reporting Blog

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

Valuation Best Practices for Alternative Investment Funds

Concerns regarding valuations of portfolio holdings of alternative investment vehicles, including hedge funds, are not new. A number of suits against a variety of investment management funds in the aftermath of the 2007-08 credit crisis were based on alleged deficiencies regarding valuation processes and practices. More recently, valuations of hedge fund portfolio investments have come under the ambit of SEC scrutiny owing to the changes ushered in by the Dodd-Frank statute promulgated in 2010. In general, investors in alternative investment vehicles could benefit by heeding disclosures regarding the valuation and reporting of portfolio investments such as are discussed in this post.

Startup Stock Secondaries: Cash In Early, Cash In Often?

Stock options are a popular way for startups to incentivize employees and remain competitive in the hiring process, as startups tend to have less cash than equity to use as bargaining chips. Traditionally, employee stock options at start-ups yield proceeds only after an initial public offering, as the options are often subject to provisions that restrict the right to sell or transfer ownership. Private company stock can also be difficult to sell as some investors may be dissuaded from purchasing stock from a company that is not listed on any public exchange. However, Google’s purchase of employee’s and early-stage investor’s ownership at LendingClub Corp. may portend a new trend in startup investment and an opportunity for private company stockholders to cash in prior to an IPO.

IVSC Issues Exposure Draft on Bases of Value

The IVSC recently released an exposure draft discussing how the three principal bases of value interact. The IVSC is in the process of evaluating international valuation procedures and guidelines and improving the consistency and clarity of valuation procedures. The IVSC recognizes three bases of value – market, investment, and fair value – but the relative value of each base depends on the circumstances of the transaction. Choosing the appropriate base of value is essential to developing a robust and defensible conclusion.

OECD Recommendations on Transfer Pricing

In July 2013, the Organization for Economic Co-operation and Development (“the OECD”) released a whitepaper on transfer pricing documentation surveying the current requirements in various tax jurisdictions as well as outlining compliance issues and making recommendations on transfer pricing documentation going forward. Not surprisingly, the OECD found a lack of congruity among the requirements of taxing authorities in the surveyed countries and a certain level of frustration among business representatives seeking to comply with ever expanding and changing requirements. The OECD is expected to finalize its recommendations and guidelines sometime early this year. It remains to be seen how such recommendations will ultimately impact the global tax environment and if such a level of convergence and cooperation is possible among taxing authorities with varying degrees of resources. Regardless of the OECD’s ultimate recommendations, transfer pricing remains an area where enterprises face stringent compliance requirements.

Equity-Based Compensation: Tax Considerations

As the commentary around the IPO of two major social media companies revealed, tax consequences of equity-based employee compensation are not always straightforward and are sometimes poorly understood. Equity compensation structures are legion, with varying tax consequences for employees and employers. Complicating matters further, prescribed accounting treatment for equity compensation expenses, including measurement dates, differ for tax and financial statement reporting purposes. An understanding of the tax consequences to the employees and the employer can help companies choose the optimal structure and instruments for their equity-based compensation plans.

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