Fair Value Broadly Inconsistent

As many predicted, the much-maligned FAS 157 fair value accounting standard is shaping up as an inconsistent metric for setting VC portfolio company valuations.

At least that’s the take of one accountant who’s deep in the process of year-end audits. Travis Drouin, partner in the audit practice of MFA-Moody, Famiglietti & Andronico, says that as firms prepare their year-end-financial statements, they’re setting widely varying estimates of fair values even for the same companies. Differences are especially pronounced for early-stage tech companies.

“You have two funds side by side with the same exact portfolio, but if they both mark to fair value and they haven’t talked to each other, you could have one valued at $10 million and another valued at $40 million,” says Drouin, whose firm works with venture funds including Charles River Partners and Bessemer Venture Partners (which aren’t necessarily represented by that example). The result, he predicts, will be more confusion for limited partners looking to use statements to gauge portfolio performance.

Valutions based on FAS 157, which requires firms to “mark to market” portfolio holdings based on what they’d be likely to sell for currently, will show up for the first-time in most firms’ end-of-year financial statements. Most venture funds are in the process of wrapping up reporting and audits, but have not yet released them to limited partners.