In December 2018, the International Private Equity and Venture Capital Valuation (IPEV) Board issued an updated version of the IPEV Guidelines (‘Guidelines’). These Guidelines set out recommendations on best practice for the valuation of private capital investments and are widely used by investment entities, such as Venture Capital Trusts, that prepare financial statements under UK GAAP and IFRSs. These Guidelines can also be used by other corporate entities that hold equity investments.
One of the key enhancements made to the Guidelines relates to the removal of ‘Price of a Recent Investment’ (PoaRI) as a specific valuation technique. In this article, we explain the reason behind this change and consider some of the implications for entities applying these guidelines.
What has changed and why?
PoaRI has been removed as a specific valuation technique in order to reinforce the premise that fair value must be estimated at each measurement date as is required by the accounting standards.
This change was made because the IPEV Board received feedback that by listing PoaRI as a valuation technique in previous versions of the Guidelines, some users had misinterpreted or misapplied the use of a transaction price. This meant that they did not undertake efforts to estimate fair value at subsequent measurement dates (ie they relied upon PoaRI ‘blindly’ without additional analysis for an extended period of time).
Does this mean that the PoaRI can never be used as a proxy for fair value?
No. It is possible that fair value may be equal to the PoaRI but this should not be the default position. For example, assuming the PoaRI results from an orderly arms-length transaction, it will generally represent fair value as of the transaction date. In addition, at subsequent measurement dates, an arms-length PoaRI may be an appropriate starting point for estimating fair value subject to adequate consideration of current facts and circumstances. For example, if the investment was made at a particular multiple, entities should consider whether there have been changes in the market or performance of the investee since that investment was made which could affect that multiple.
What are the implications for entities applying these Guidelines?
The PoaRI should no longer be disclosed as a stand-alone valuation technique in the financial statements. Where an arms-length PoaRI is being used as a starting point for estimating fair value at subsequent measurement dates, the financial statements should make clear which specific valuation technique is being used (eg multiples of earnings or revenues). In addition, the PoaRI should, in these cases, be used to calibrate inputs into the specific valuation technique that has been chosen for subsequent measurement.
Where can I find more information about this change?
More information about the removal of PoaRI as a valuation technique can be found in sections 3.3 and 3.10 of the IPEV Guidelines.
For help and advice on valuations related matters, please get in touch with your usual BDO contact or Simon Jones.
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