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					ASC 820
Fair Value Measurements and Disclosures:
Best Practices for Implementation and Compliance
for the Alternative Investment Industry -
2010 Update
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themselves, or for professional judgment as to adequacy of disclosures and fairness of presentation. The materials do not encompass all possible disclosures required by
accounting principles generally accepted in the United States of America. The form and content of each reporting entity’s financial statements are the responsibility of the
entity’s management. The materials are being provided with the understanding that the information contained therein should not be construed as legal, accounting, tax
or other professional advice or services. The contents are intended for general informational purposes only and it should not be used as a substitute for consultation with
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December 2010



Dear Clients and Friends:



Rothstein Kass is pleased to present this updated implementation and compliance guide relating to Financial Accounting
Standards Board (FASB) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”).

As a leading international professional services firm providing audit, tax and consulting services to an array of sophisticated
and discerning clients, Rothstein Kass is proud of our association with the alternative investment community. Our collaborative
culture has enabled our firm to grow alongside the industry through extensive and frequent interactions with our clients, their
administrators and service providers. We believe that this guide represents a practical approach to implementing and complying
with the requirements of ASC 820, including sample financial statement footnotes and a Frequently Asked Questions section.

Well before the onset of the global credit crisis, the FASB had taken steps to reconcile disparate conceptions of “fair value”
as it appears in many different authoritative references through the GAAP hierarchy. A good portion of these efforts centered
on the development of consistent valuation standards for illiquid or “level three” holdings. In the months immediately following
the market meltdown, these issues were briefly pushed to the forefront as some hedge funds were forced to unwind profitable
positions to meet a raft of redemption requests from investors facing their own liquidity concerns. For many funds, the sudden
need for increased liquidity served as a harsh reminder of the importance of aligning fund objectives and strategies with those
of its investors to promote stability.

At the same time, misconceptions regarding the nature and practices of the alternative investment community made the industry
a likely target of ambitious regulatory reform intended to prevent future market upheaval. Thorough analysis has since shown
that hedge funds did not pose systemic risk, while effective advocacy has helped to promote understanding among legislators
and regulators. As a result, the final financial reform bill reflects an informed and reasoned approach to industry regulation.
Implemented in concert with enhanced fair value guidelines, these efforts should help to provide the greater level of transparency
that the market demands.

Transparency will be even more critical as asset flows from institutional investors allow a greater portion of Americans to gain
access to the alternative investment industry through retirement accounts. Amid intense competition, the percentage of illiquid
assets and the methodology for valuing these holdings will be important considerations for investors. Needless to say, the FASB
has tremendous relevance to the financial services industry. ASC 820, for example, offers a framework for comparability and
consistency that will help to establish institutional-quality best practices across our industry.

While our intention is to clarify the fundamental aspects of ASC 820, it is still clear that fair value remains an art, not a science.
We are confident that you will find this paper informative and helpful. Please reach out to me, Christopher Mears or any of the
Principals in our Financial Services Group if we can be of assistance.




Howard Altman
Co-CEO and Co-Managing Principal
Rothstein Kass
                                                 ASC 820 - Fair Value
                                     Measurements and Disclosures:
                                    Best Practices for Implementation
                                   and Compliance for the Alternative
                                  Investment Industry - 2010 Update
Overview                                     Implementation Challenges for the             It takes on an “exit price” approach. In
                                             Alternative Investment Industry” dated        the past, many measures of fair value
On July 1, 2009, the Financial Accounting    September 2008, the FASB has made             under U.S. GAAP were based upon the
Standards Board (“FASB”) launched            several updates to the fair value guidance    entry price or management’s “good faith”
a single source of authoritative             contained in U.S. GAAP. The following         measurement. Under current U.S. GAAP,
non-governmental guidance called the         updated white paper contains the most         the entry price cannot be presumed to
FASB Accounting Standards Codification       up-to-date information from current           be representative of the fair value at initial
(“ASC” or the “Codification”). The           guidance contained in the Codification        recognition. Transactions between related
Codification does not change United          that effects the alternative investment       parties or under duress (“forced sales”)
States Generally Accepted Accounting         industry (e.g., hedge funds, private          are examples that may preclude an entry
Principles (“U.S. GAAP”), but rather it is   equity funds and fund of funds), herein       price from approximating the fair value.
a new structure which takes accounting       referred to as “fund(s).”                     In addition, there may be instances in
pronouncements and organizes them by                                                       which the initial transaction occurs in a
accounting topics. ASC Topic 820, Fair       Notwithstanding the updates and               market different than the market that a
Value Measurements and Disclosures           clarifications made by the FASB to the        fund would have access to in exiting the
(“ASC 820”) (formerly FASB Statement         guidance for fair value measurements          investment. For example, a broker may
No. 157 Fair Value Measurements, “SFAS       and disclosures, one thing has not            transact in an inter-dealer market where
157”) is now the sole source for guidance    changed, the definition of fair value.        that market is not available to the fund. In
on how entities should measure and           Fair value is defined in ASC 820 as the       addition, entry prices include transaction
disclose fair value in their financial       “price that would be received to sell         costs that may not be recoverable in an
statements. Since the issuance of            an asset or paid to transfer a liability in   exit price. These principles open the door
our previous white paper entitled            an orderly transaction between market         to potentially recognizing “day one” gains
“SFAS 157 Fair Value Measurements:           participants at the measurement date.”        and losses on transactions.




                                                                                                                Rothstein Kass 1
Fair value continues to be measured           observable inputs other than quoted          to use its judgment to evaluate whether
using all assumptions utilized by             prices used to value Level 1 securities,     market inputs are “observable.”
marketplace participants, including           while Level 3 consists of the most           Transaction-based market inputs tend
risk assumptions considered by those          “unobservable” inputs (e.g., highly          to be more reliable. The range between
participants. The measurement of fair         illiquid securities). ASC 820 emphasizes     bid-and-ask prices can indicate as to
value assumes an orderly, hypothetical        that valuation techniques used to            whether the market is active or inactive.
transaction in the principal market for       measure fair value shall maximize the        A more active market will generally
the asset or liability. However, if the       use of observable inputs and minimize        dictate narrow ranges between the
volume and level of market activity for       the use of unobservable inputs.              bid-and-ask quotes with more illiquid
an asset or liability has significantly                                                    markets having larger spreads.
decreased, and transactions in a              For example, if a fund utilizes observable
particular market are not orderly, ASC        inputs in an orderly market to determine     Determining Fair Value when
820 provides additional guidance on           fair value, such as market prices from       a Market is “Inactive” and
factors to consider in estimating fair        an exchange or dealer market, the fund       Transactions are “Not Orderly”
value. Moreover, if no principal market       is precluded from using an internal
exists, and there are multiple markets,       valuation model (e.g., discounted cash       As a result of the recent financial crisis,
then the most advantageous market             flow model) and cannot ignore readily        the FASB issued additional fair value
is used.                                      available market prices. However, the        measurement guidance in April of
                                              more illiquid the investment, the greater    2009 for estimating fair value when the
(Editor’s note: The use of the most           the need exists to use multiple valuation    volume and level of activity for an asset
advantageous market when multiple             techniques to arrive at fair value.          or liability has significantly decreased
markets exist goes against the grain of                                                    and when a transaction is deemed
“conservatism” but this is clearly what       What Are Observable Inputs?                  “not orderly.” This guidance reinforces
the FASB intended.)                                                                        the notion that fair value is based on
                                              Observable inputs are inputs based           orderly transactions under current
For illiquid securities where a market may    on market data obtained from sources         marketplace assumptions. Funds are
not exist, a fund must develop a fair value   independent of the entity and should         not compelled to rely on quotations
approach based upon a hypothetical            not be limited to information that is only   which reflect distressed transactions.
market which incorporates assumptions         available to the entity making the fair      However, it is also inappropriate to
potential market participants would use       value determination or to a small group      apply a “hold-to-maturity” approach to
in purchasing the security.                   of users. Observable market inputs should    fair value or to use assumptions based
                                              be readily available to participants in      on “normalized” market conditions.
One of the most significant elements          that market. In addition, observable         When current prices are not indicative of
of ASC 820 is the use of a three-level        market inputs should include a level         orderly market transactions, funds should
fair value hierarchy. Level 1 consists of     of transparency that is reliable and         utilize alternate valuation techniques
the most “observable” market inputs           verifiable. Observable market inputs are     to estimate fair value under current
to arrive at fair value (e.g., liquid         typically a by-product of having sources     market conditions.
investments). Level 2 would broadly           that are knowledgeable and active in the
include assets and liabilities valued using   particular market. Management will have




2 Rothstein Kass
When determining fair value, funds should        Significant judgment may be required            customary for transactions involving
consider whether factors exist that indicate     to determine whether there has been a           such assets or liabilities under current
a significant decrease in the volume and         significant decrease in the volume and          market conditions.
level of activity for an asset or liability by   level of activity for the asset or liability   • There was a usual and customary
comparing those levels to normal levels of       based on the weight of the evidence.            marketing period, but the seller
market activity. Those factors include, but      When the market has become less                 marketed the asset or liability to a
are not limited to whether:                      active or is no longer active, there is an      single market participant.
                                                 increased likelihood of distressed or          • The seller is in or near bankruptcy
• There are few recent transactions.             forced transactions underlying market           or receivership (that is, distressed) or
• Price quotations are not based on              transactions. Therefore, quoted prices          the seller was required to sell to meet
  current information.                           become less reliable indicators of fair         regulatory or legal requirements (that
• Price quotations vary substantially either     value. In circumstances where there             is, forced).
  over time or among market makers (for          has been a significant decrease in             • The transaction price is an outlier
  example, some brokered markets).               the volume and level of activity for an         when compared with other recent
• Indexes that previously were highly            asset or a liability in relation to normal      transactions for the same or similar
  correlated with the fair values of the         market activity, additional steps should        asset or liability.
  asset or liability are demonstrably            be taken to determine whether other
  uncorrelated with recent indications           valuation techniques and inputs are            The challenge for most funds is having
  of fair value for that asset or liability.     needed to meet the objective of a fair         sufficient market intelligence available
• There is a significant increase in             value measurement.                             to evaluate whether a transaction is
  implied liquidity risk premiums,                                                              orderly or if it is a distressed or forced
  yields, or performance indicators              It is not appropriate to presume that all      sale. In situations where funds do not
  (such as delinquency rates or loss             transactions in an inactive market are         have enough information to conclude
  severities) for observed transactions          not orderly (that is, distressed or forced).   one way or the other on whether it is
  or quoted prices when compared                 If the reporting fund concludes that           an orderly transaction, the fund should
  with the reporting fund’s estimate of          there has been a significant decrease          consider the transaction price as an
  expected cash flows, considering all           in the volume and level of activity for        input in estimating fair value. However,
  available market data about credit             the asset or liability in relation to normal   it should not be the sole basis to arrive
  and other nonperformance risk for              market activity, the fund should then          at fair value. All information that is
  the asset or liability.                        consider whether circumstances exist           available without undue cost and effort
• There is a wide bid-ask spread or              that indicate that transactions associated     should be considered.
  significant increase in the bid-ask spread.    with the quoted prices are not orderly.
• There is a significant decline or absence      Such circumstances include, but are            The best practice is to employ multiple
  of a market for new issuances (that is, a      not limited to whether:                        valuation techniques. A fund should place
  primary market) for the asset or liability                                                    less weight on transactions which the
  or similar assets or liabilities.              • There was not adequate exposure              fund does not have sufficient information
• Little information is released                  to the market for a period before             to conclude whether transactions are
  publicly (for example, a principal-             the measurement date to allow for             orderly when compared with other
  to-principal market).                           marketing activities that are usual and       transactions that are known to be




                                                                                                                       Rothstein Kass 3
orderly. The use of broker quotes and              inputs other than the directly observable      For exchange-traded instruments such
pricing services are common valuation              quoted price. These “other market              as securities sold short and exchange-
techniques employed by funds. The fund             inputs” are often used in conjunction          traded derivatives, common practice
must attempt to obtain transparency from           with valuation models and include              has been to use market quotations to
the sources of these fair value estimates          interest rates, yield curves, prepayment       determine the fair value of an identical
and make a determination of whether                speeds, default rates and other market-        liability when the instrument is traded as
the broker quotes are based upon                   corroborated inputs.                           an asset. However, in many cases, the
current information that reflects orderly                                                         availability of relevant observable inputs
transactions or a valuation technique that         Level 3 Inputs - include those inputs          to determine the fair value of a liability can
reflects market participant assumptions.           that are not currently observable              be limited or unavailable. Certain liabilities
                                                   (e.g., an option-pricing model using           are unable to be traded in the open
(Editor’s note: The larger the variance            historical volatility, a fund’s own data       marketplace due to contractual or other
between the fair value estimate determined         or assumptions such as a multiple              legal restrictions which prevents their
by management and the broker quote that            of earnings or discounted cash flow            transfer. Furthermore, the unit of account
is considered not to be orderly, the higher        projections, etc.).                            for an instrument traded as an asset can
the expectation to have additional support                                                        result in a difference in value from the unit
from multiple valuation methods.)                  Refer to Exhibit 1 for a matrix of the         of account when traded as a liability. As
                                                   levels and examples of securities that         a result, questions have arisen on how to
Fair Value Hierarchy                               typically fall within each level.              determine the fair value of a liability in a
                                                                                                  hypothetical transaction when the liability
The three levels of the fair value                 Application of Fair Value                      is restricted from being transferred, or
hierarchy and the material valuation               Measurements to Liabilities                    when sufficient observable market data
inputs are as follows:                                                                            is not available.
                                                   The fair value measurement premise for
Level 1 Inputs - include unadjusted                liabilities assumes both of the following:     In August of 2009, the FASB issued
quoted prices for identical assets or                                                             additional guidance to address the
liabilities in active markets (e.g., exchange-      a. The liability is transferred to a market   uncertainties and to enhance the
traded securities). An active market is                participant at the measurement             consistency in applying the fair value
defined as a market in which transactions              date (the liability to the counterparty    measurement principles to liabilities.
for the asset or liability occur with sufficient       continues; it is not settled).
frequency and volume to provide pricing                                                           If a quoted price in an active market
information on an ongoing basis.                    b. The nonperformance risk relating           for the identical liability is available, the
                                                       to that liability is the same before       quoted price should be used and would
Level 2 Inputs - include quoted prices                 and after its transfer.                    represent a Level 1 measurement. In
for identical assets in markets that are                                                          circumstances in which a quoted price
not active (e.g., thinly traded securities),       The notion of determining the exit price       in an active market for the identical
quoted prices for similar assets (e.g.,            of a liability based on the price that would   liability is not available, a reporting fund
restricted securities, private investments         be received to transfer the liability has      shall measure fair value using one or
in public companies, etc.), or market              raised many implementation questions.          more of the following techniques:




4 Rothstein Kass
  a. A valuation technique that uses:              should consider whether the quoted price          existence of master netting arrangements,
     1. The quoted price of the identical          of the asset should be adjusted include           when determining the fair value of financial
        liability when traded as an asset.         the following:                                    liabilities transacted with counterparties.


     2. Quoted prices for similar liabilities       a. The quoted price for the asset relates        (Editor’s note: Liabilities such as
        or similar liabilities when traded as           to a similar (but not identical) liability   reverse repurchase agreements
        assets.                                         traded as an asset.                          and debt facilities are fixed and
                                                                                                     determinable obligations of a fund
  b. Another valuation technique that is             b. The unit of account for the traded           and should be presented at face value
     consistent with the principles of                  asset is different from that of the          unless the fair value option is elected
     ASC 820.                                           liability (e.g., the quoted price for the    under ASC 825, Financial Instruments.)
                                                        asset includes the effect of a third-
Examples of valuation techniques                        party credit enhancement).                   Significance of an
consistent with the principles of ASC                                                                Unobservable Input
820 include an income approach, such               When measuring the fair value of a liability
as a present value technique, or a                 using a valuation technique consistent            The level designation in the fair value
market approach, such as a technique               with the principles of ASC 820, funds             hierarchy is based on the lowest level
that is based on the amount at the                 should consider whether market inputs             input that is significant to the fair value
measurement date that a fund would pay             are derived from orderly transactions, as         measurement. However, the term
to transfer the identical liability or would       well as whether internal valuations may           “significant” is not defined by ASC
receive to enter into the identical liability.     be more representative of fair value.             820. In assessing the significance of a
                                                                                                     market input, a fund should consider the
When measuring the fair value of a liability       Funds should consider the effect of               sensitivity of the financial instrument’s
using the quoted price of the instrument           their own nonperformance risk when                fair value to changes in the input used.
when traded as an asset, a fund shall not          determining the fair value of liabilities. This   Assessing the significance of an input
adjust the quoted price of the asset for           can result in a seemingly counterintuitive        will require judgment considering
the effect of any restrictions preventing          valuation result, as a decline in a fund’s        factors specific to the financial
the transfer of the liability. It is assumed       creditworthiness would result in a lower          instrument being valued. The tone from
that the impact of any restrictions relating       fair value measurement for a liability            the top should be one of conservatism
to the transfer of a liability is built into the   (e.g., a higher discount rate applied to          in assigning level designations to
value of the liability at inception. However,      expected cash flows), therefore resulting         securities with unobservable inputs.
the quoted price of the liability when             in the recognition of an unrealized gain.         By the design of the principles-based
traded as an asset shall be adjusted for           However, the fair value of the instrument         standard, determining the significance of
factors specific to the asset that are not         should be considered from the perspective         a market input is a matter of judgment.
applicable to the fair value measurement           of a market participant creditor; that is,        Consequently, two unrelated funds
of the liability. Any adjustment to the            the credit impairment of the debtor would         assigning level designations to the same
quoted price when traded as an asset               result in a reduction in value to the creditor.   investment using similar unobservable
would preclude Level 1 classification.             Funds should consider the impact of               inputs may reach different conclusions.
Some circumstances in which a fund                 their nonperformance risk, including the




                                                                                                                         Rothstein Kass 5
Best Practices for Fair Value                year-end financial reporting process.       Compliance with the fair value
Measurements and Disclosures                 As a best practice, a fund should           measurement and disclosure guidance
                                             perform a soft close as of an interim       should include:
Many have underestimated the scope,          date (e.g., September 30), which would
complexity and time required to              include the preparation of all footnote     • Documenting policies and procedures
implement and remain current with the        disclosures required by ASC 820. It is       to comply with ASC 820, including
fair value measurement and disclosure        important to note that if a fund engages     monitoring active vs. inactive markets,
requirements contained in U.S. GAAP.         an administrator for the preparation of      aftermarket events and reliability of
Whether there is a need to implement         its financial statements, management         market data.
the fair value guidance in ASC 820 for       should understand the processes and         • Addressing system requirements for
the first time (a new fund), or comply       data used by the administrator to prepare    data aggregation.
with updates to existing fair value          the required fair value disclosures.        • Evaluating the level designations
measurement and disclosure guidance,         The “Champion” of the implementation         within the fair value hierarchy on a
management needs to establish an             process should manage the coordination       monthly basis.
effective protocol in determining fair       with the administrator well before the      • Performing a soft close as of an
value. We recommend management               year-end close.                              interim date including the preparation
create a financial reporting team. When                                                   of all of the required financial footnote
implementing the guidance of ASC 820,        In addition to providing a framework         schedules and disclosures prior to the
the financial reporting team should first    in determining how to arrive at fair         year-end close.
understand (1) how to measure fair value     value, ASC 820 also provides greater        • Coordination with third party service
based on a fund’s portfolio, and (2)         transparency to investors regarding          providers (administrators, CPA firms,
the content and format of the required       (a) the types of investments a fund          pricing services and prime brokers).
financial statement disclosures. Also,       is invested in, (b) the methods used
we recommend management assign               to value those investments, (c) the         Refer to Exhibit 3 for frequently asked
a “Champion” to the implementation           risk exposures underlying those             questions in applying ASC 820.
process who will effectively liaise          investments, (d) movements between
between the investment management            fair value hierarchy levels, and (e) the    Valuation Policies
team, valuation committee, and other         portion of a fund’s performance derived     and Procedures
internal accounting and technology           from Level 3 securities. Ultimately,
staff. Furthermore, once the financial       the required fair value disclosures will    Management will need to have a process in
reporting team is established, we            become a tool that fund investors can       place to allow it to gather the necessary
recommend that they reach out to their       use to evaluate a fund’s portfolio.         information to comply with the fair value
auditor and fund administrator to gain                                                   measurement and disclosure standards.
an understanding of how those outside        Complying with the guidance in ASC          To that end, management should
parties could add value to the process.      820 has many challenges. The fair value     continually monitor a fund’s front- and
By including certain outside third parties   measurement and disclosure guidance         back-office accounting systems used
throughout the fair value measurement        in ASC 820 has increased the complexity,    to track and produce valuation data.
and disclosure process, a fund can           internal resources and time required for    This will allow a fund to make informed
avoid unwanted surprises during the          year-end financial reporting.               decisions on valuation techniques and




6 Rothstein Kass
the assignment of level designations for     inputs and techniques used, including         component of nonperformance risk,
the investments within a fund’s portfolio    how the fair value measurement of             however, other risks such as regulatory
(“tagging of investments”).                  assets and liabilities fit into the fair      and other operational considerations
                                             value hierarchy.                              may influence overall nonperformance
In our discussions with fund managers       • Evaluating the effect of investment          risk as well.
and administrators, the tagging of           restrictions.
investments is performed either on a        • Identifying risk assumptions reflected       As part of the valuation process,
monthly, quarterly, or annual basis.         in unobservable inputs.                       funds should consider the impact
The best practice is to tag securities      • Identifying the reports that will provide    of any nonperformance risks with
at a minimum on a quarterly basis.           the required data to prepare the year-        respect to their counterparties to
If resources permit, we recommend            end financial statement disclosures,          securities and derivative transactions.
tagging securities on a monthly basis.       including reconciliations of those reports    Generally, additional consideration
Level designations can change as             to the books and records of the fund.         of nonperformance risk will not be
dictated by continually evolving market     • Back testing of realized transactions.       necessary for exchange-traded
conditions. A fund’s accounting system                                                     securities since quoted prices will
should have the necessary data fields to    (Editor’s note: As part of a fund’s review     include the effects of market participant
allow it to tag each security and enable    of its valuation policies and procedures, a    assumptions on credit risks. In addition,
the fund to generate reports showing        best practice is to “back test” all material   exchange-traded derivatives, such as
the level designations by security.         Level 2 and Level 3 investments by             futures contracts and certain option
                                            comparing the investment’s transaction         contracts, are generally subject to
Management and auditors alike will need     price in the subsequent period [realized       market protections, such as daily
to review a fund’s valuation policies       proceeds from the sale of an asset             margin postings and guarantees from
and procedures on a periodic basis. In      or disbursements made to settle a              the exchange clearinghouse, which
general, these policies should address      liability] against the fair values of those    mitigates the impact of nonperformance
the following:                              investments reported in the most recent        risk outside of those reflected within
                                            financial reporting period.)                   the quoted prices. Therefore, the fair
• Methodology on level designation.                                                        value processes for exchange-traded
• Definition of an active market.           Consideration of                               derivatives are generally not expected
• The level of average trading volume       Counterparty Risks Within                      to involve significant nonperformance
 and frequency that will deem an            Fair Value Measurements                        risk adjustments. We expect that the
 investment as thinly traded (i.e.,                                                        consideration of counterparty risks
 inactive), which may require a Level 2     The impact of nonperformance risks             will be more significant for valuations
 or Level 3 designation.                    is viewed by market participants as            of illiquid securities and derivatives
• Determination of the principal and/or     an essential component of a fair value         transacted over-the-counter with
 most advantageous market.                  measurement. Nonperformance risk               financial institutions.
• Identifying aftermarket events and        represents the risks that a party to a
 their impact on fair value.                transaction will not perform under its         When funds rely on valuation inputs
• Quantitative and qualitative              obligation. Generally, an entity’s credit      other than quoted prices for the
 documentation on the valuation             risk represents the most significant           valuation of illiquid securities, funds




                                                                                                              Rothstein Kass 7
should consider the use of observable        the valuation of its liability positions.     The level of due diligence review of third
credit data that would be relevant from a    Funds should monitor the credit risks         party pricing services and quotes
market participant standpoint. The effect    of the financial institutions they transact   received from broker-dealers will depend
of significant nonperformance risks on       with at each reporting period. Publicly       on facts and circumstances such as:
the valuation of illiquid securities can     available information such as published
influence the determination of inputs        credit ratings, credit spreads, credit        • Type and complexity of the investment.
such as projected cash flows and             default swap rates, and SEC filings           • Liquidity of the market and access
valuation discounts to reflect market        may be utilized. Funds should consider          to actual transactions and other
participant assumptions.                     the responsiveness of available credit          observable inputs.
                                             risk information to changes in market         • Nature and complexity of pricing
For over-the-counter derivatives, the        conditions as part of their monitoring          methodologies and assumptions.
evaluation of a fund’s counterparty          process, as certain data, such as             • Historical accuracy.
credit risk exposures should include         default rates, may not provide timely         • Background and expertise of service
the consideration of master netting          information relating to a counterparty’s        providers in valuing the financial product.
arrangements (e.g., standardized             current status of nonperformance risk.
International Swaps and Derivatives                                                        Best practices should include an
Association agreements), collateral          Use of Third Party                            ongoing monitoring process to verify the
balances, contract settlement provisions,    Pricing Services and Broker-                  reliability of the pricing methodologies,
and the attributes of the different          Dealer Quotations                             assumptions and sources used. Back
derivative contract types. To the                                                          testing of pricing service valuations and
extent an enforceable master netting         Understanding the nature and content          broker-dealer quotations should be part
arrangement exists, a fund may need to       of the services provided by the third         of the ongoing monitoring procedures.
incorporate valuation adjustments at the     party pricing services regarding
portfolio level to consider the effects of   valuation information is management’s         Accounting for Transaction Costs
nonperformance risks on the valuation        responsibility. Management must
of derivatives held with a particular        understand the methods used by third          U.S. GAAP requires the capitalization
counterparty. However, funds should          party service providers and determine         of transaction costs in the initial cost of
carefully review any master netting          whether the pricing data is transactional     the asset or liability (i.e., the entry price).
arrangements to determine whether the        or model-based. If pricing data is model-     In contrast, the fair value of the asset
arrangements permit the netting to apply     based, management must understand             or the liability represents the price that
between different product types. For         the significant inputs used and how           would be received for the asset or paid
derivatives in a net asset position held     they are impacted by changing market          to transfer the liability (i.e., the exit price).
with a financial institution counterparty,   conditions. In addition, management           Since the fair value of an investment
the credit risk of the counterparty should   must understand how and when                  does not include costs that are required
be considered as part of the assumptions     changes to the methods and models             to complete a sale transaction, such as
of what a market participant would pay       used by third party pricing services will     commissions or closing costs in many
for the asset positions. For derivatives     be communicated and how they will             instances, there will initially be an
in a net liability position, a fund should   impact a fund’s level designations.           unrealized loss for a security that has
consider its own credit risk as part of                                                    capitalized transaction costs. Therefore,




8 Rothstein Kass
day one recognition of gains and losses     bid-ask spread. As a best practice,           investments is generally based upon
on purchases of assets or liabilities,      a fund’s accounting system should             the price of the actively traded public
reflecting the difference between the       generate an exception report based on         equity price on an “as-if” converted
fair value and the transaction price,       this quantitative threshold in order to       basis less discounts applied to take
are permissible under U.S. GAAP.            determine whether investments should          legal restrictions into consideration,
                                            be transferred out of Level 1. To perform     liquidity risk, price volatility, and other
Considerations for                          this exercise, a fund should obtain the       risk assumptions. In practice, we have
Level Designations                          trading history (e.g., last 30 days) of       seen discounts typically range from
                                            each investment held at month-end.            5% to 30% (with higher discounts on
Level 1
                                                                                          a case-by-case basis). In situations
Typically, securities traded on an          Aftermarket Events                            where the discount is significant or
active market, such as the NYSE,                                                          when convertible securities are not in
AMEX, or other major exchanges will         In addition, ASC 820 requires consideration   the money, these positions will typically
be classified as Level 1, provided that     of aftermarket events (this would include     move into Level 3.
(a) the market is the principal (or most    normal trading days and when an
advantageous) market and (b) the fund       accounting period ends on a non-              In applying liquidity discounts, a fund
has the ability to access the principal     business day, such as a weekend or            must consider assumptions used to
(or most advantageous) market.              holiday). A fund’s valuation policy should    arrive at fair value from the perspective
However, when a security is thinly          monitor the variances between the last        of a market participant.
traded and its reported “fair value” is     closing price at the measurement date
not representative of an active market      and the aftermarket events. Variances         (Editor’s note: Consideration of the
(or if trading is halted), the security     over a threshold amount determined by         quantity of the investment held by a
may need to be transferred into Level       management should be reviewed and             fund, or a fund’s intention to hold an
2 or Level 3. As discussed previously       the fair value of the investment should       investment, is not relevant in estimating
in the section entitled Determining         be adjusted when variances are deemed         fair value at the measurement date.)
Fair Value when a Market is “Inactive”      material. Any adjustment to the price
and Transactions are “Not Orderly”, a       provided by an exchange would move            Derivatives Valued Using Models
fund should consider certain factors        that security into Level 2.
to determine if there has been a                                                          In order for derivatives that are valued
significant decrease in the volume or       Level 2                                       using models (e.g., interest rate swaps)
level of activity and if a transaction is   Liquidity Discounts                           to qualify for a Level 2 designation, the
deemed not orderly.                                                                       model used to measure fair value must:
                                            Level 2 inputs are inputs other than
A fund’s valuation policy should include    quoted market prices included within          • Be widely accepted.
a quantitative threshold to determine       Level 1 that are observable. Level            • Be non-proprietary.
what constitutes an active market,          2 securities will include restricted          • Use data that is observable.
which typically will be based on average    stock, private investments in public
trading volume, frequency of observable     equity (PIPEs) and certain convertible        Certain inputs derived through
transactions, and evaluation of the         bonds. The fair value of these types of       extrapolation may be corroborated by




                                                                                                              Rothstein Kass 9
observable market data and still maintain      When considering a new round of              Investments in Private
Level 2 status (e.g., extrapolating a five-    financing into the fair value inputs, the    Investment Companies
year interest rate yield into a seven-year     following factors should be considered:
yield). However, if there are significant                                                   Since the issuance of SFAS 157,
judgments or adjustments made to either        • Attributes and characteristics of          questions regarding the use of Net
the model or data, the derivatives may          the transaction.                            Asset Value (“NAV”) in determining the
be considered Level 3. For example, the        • Complexity of the capital structure.       fair value of alternative investments have
extrapolation of short-term inputs for         • Proximity to reporting date.               been raised by auditors, constituents,
longer-term inputs may require additional      • Any changes in the portfolio company       and financial statement preparers.
assumptions or judgments that are               in the intervening period between           Diversity in practice existed when fund
not observable, therefore moving the            transaction date and reporting date.        management and administrators used
investment to Level 3.                         • Again, cost can be considered (but not     various techniques to adjust NAV in
                                                on its own) since it cannot be presumed     determining the fair value of its interests
Level 3                                         to be fair value.                           in certain alternate investments, such as
Private Operating Companies                                                                 hedge funds, private equity funds, real
                                               As a best practice, a fund’s financial       estate funds, offshore fund vehicles,
Investments in private operating               reporting team should document the           and funds of funds. The widespread
companies, also known as private               fair value measurement of its private        diversity in practice resulted in arbitrary
equity investments, will generally be          equity investments by performing an          adjustments to NAV. In response to
categorized in the fair value hierarchy as     ongoing review of the approaches used        stakeholders concerns, the FASB issued
a Level 3 investment, given the lack of        to determine fair value. A fund should       an update to ASC 820 that provides
observable market inputs. Many funds           incorporate multiple valuation techniques    additional guidance for reporting entities
that invest in private equity companies        to determine fair value of its investments   that have investments in certain entities
have traditionally recorded the fair value     in private operating companies such as a     that calculate NAV to determine fair
of those investments at their initial cost,    discounted cash flow analysis as well as     value. The updated guidance in ASC 820
and subsequently made adjustments              a market based approach that includes        applies to investments if the investment
when there was a new round of                  information of comparable public             meets both of the following criteria at the
financing. One of the talking points we        companies. A market based analysis           measurement date:
have used with clients over the years in       should also include comparisons of
regard to private equity investments is        public company performance multiples         • There is no readily determinable fair
that “cost is not fair value, but fair value   as part of its supporting documentation       value for the investment (i.e., if active
can approximate the cost.” A fund’s            of fair value. Furthermore, a fund            market quotations are available for the
valuation policy should document the           should include the use of multiple            investment, then the quoted prices
fair value of private equity investments       valuation techniques to supplement            should be used).
through its use of internal analysis,          and corroborate the fair value of a          • The investment has all of the attributes
review of portfolio company financial          recent round of private equity financing.     of an investment company as specified
statements, and comparison of the fair                                                       in the Codification, or if it lacks one or
value of public securities to the fair value                                                 more of the specified attributes and it
of its investment in the private equity.




10 Rothstein Kass
 is industry practice to issue financial    “look through” to the investee fund’s          • Qualifications, if any, of the auditor’s
 statements using guidance that is          investments as long as a reporting fund         report or whether there is a history
 consistent with measurement principles     evaluates the effectiveness of each of its      of significant adjustments to the NAV
 of investment companies.                   investee funds’ processes over internal         reported by the investee fund manager
                                            controls and valuation practices of the         as a result of its annual audit or
ASC 820 provides that a fund may            investee and is able to conclude that the       otherwise.
now use NAV as a practical expedient        reported NAV is calculated in a manner         • Evaluate the basis of accounting
when determining the fair value of its      consistent with ASC 946. However,               of the investee fund (i.e., U.S. GAAP,
interests in alternative investments        before concluding that the reported             International Financial Reporting
unless it is probable the investments       NAV is calculated in accordance with            Standards (“IFRS”), income tax
will be sold at a price other than NAV.     the measurement principles of ASC 946,          basis, cash basis, etc.).
Furthermore, a reporting entity is          the reporting fund should consider
permitted to estimate the fair value of     the following:                                 Moreover, when determining whether the
certain alternative investments using                                                      investment will be categorized as Level 2
NAV without further adjustment if           • Evidence gathered during the initial         or Level 3 within the fair value hierarchy, a
NAV is calculated consistent with the        due diligence and ongoing monitoring          reporting fund must consider the length
guidance in ASC Topic 946, Financial         procedures of the investee fund.              of time remaining until the investment
Services - Investment Companies,            • The investee fund’s fair value estimation    becomes redeemable. As long as the
(“ASC 946”) (formerly the AICPA Audit        processes and control environment,            reporting fund has the contractual and
and Accounting Guide, Investment             as well as its policies and procedures        practical ability to redeem at the NAV in
Companies) as of the reporting entity’s      for estimating fair value of underlying       the near term at the measurement date,
measurement date.                            investments, and any changes to those         then an investment may be classified
                                             processes, the control environment, or        as Level 2, even if a redemption notice
(Editor’s note: While funds will benefit     policies or procedures.                       was not submitted. “Near term” is a
because of the reduced time and effort      • The use of independent third party           matter of professional judgment, and
required to use the practical expedient,     valuation experts.                            historically has been defined by the
management must still take responsibility   • The portion of the underlying securities     FASB as a period of time not to exceed
for the fair value measurement of            held by the investee fund that are            one year from the measurement date.
alternative investments.)                    actively traded (i.e., Level 1 securities).   However, a redemption period of 90
                                            • Comparison of historical realizations        days or less would likely be considered
A common question that is often raised       to last reported fair value (i.e., back       near term since any potential discount
is whether a reporting fund is permitted     testing of securities).                       relative to the time value of money
to “look through” to the underlying         • Whether NAV has been appropriately           to the next redemption date would
investee funds’ investments to either        adjusted for items such as carried            not likely be considered a significant
determine fair value or for financial        interest and clawbacks.                       unobservable input. It is important to
statement presentation. In cases where      • The professional reputation and              note that a redemption period of 90
a fund invests in an investee fund that      standing of the investee fund’s               days or less should not automatically
invests in other underlying investments,     service providers such as its auditor         be deemed near term. Other facts and
the reporting fund is not required to        and administrator.                            circumstances, such as the likelihood




                                                                                                             Rothstein Kass 11
or actual imposition of gates, and           transact at the same reported NAV.          U.S. GAAP also requires reporting
the liquidity of the investee fund’s         The use of redemption gates and side        entities provide additional disclosures for
portfolio, should also be considered by      pockets are common techniques used          its investments in certain investees that
the reporting fund in determining the        to manage the liquidity of a fund in an     calculate NAV regardless of whether the
appropriate level within the hierarchy.      orderly manner. The mere existence of       reporting entitiy uses NAV as a practical
In situations when there are material        contractual provisions permitting the       expedient. The disclosures are intended
adjustments to NAV to arrive at fair         use of gates and side pockets might         so users of financial statements can
value the result will typically be a         not normally have an effect on fair value   understand the nature and risks of the
Level 3 designation.                         unless those provisions are actually        investments. The following disclosures
                                             exercised. These considerations are         must be made by each major category
For funds that are either precluded from     likely to be evaluated by the reporting     of investment for interim and annual
or elect not to use NAV as a practical       fund as part of its initial due diligence   reporting periods:
expedient to estimate fair value, such as    procedures when making an investment
when a sale of an investment is probable     in a particular fund. These features are    • Fair value and a description of the
at an amount different from NAV, or an       generally considered and accepted by         significant strategies of investee(s).
adjustment to the reported NAV cannot        market participants, and may not result     • For investments that cannot be
be estimated, the specific attributes        in any adjustment to NAV. However,           redeemed, the estimated time that it
of the investment that independent           reporting funds should still consider        will take the investee(s) to liquidate the
market participants would take into          these features in conjunction with other     underlying assets.
account in valuing the investment must       inputs available to value the investment.   • Unfunded commitments to investee(s).
be considered. The features, risks                                                       • Redemption or liquidity terms such
and other restrictions related to each       In summary, if market participants           as notice periods and redemption
investment should be evaluated in the        would be expected to place a discount        times (e.g., 60-day notice period with
aggregate since those attributes may         or premium on the reported NAV               monthly liquidity).
be considered by a market participant        because of risks, features or other         • Temporary restrictions on redemptions
with access to the market for the            factors relating to the investment,          from otherwise redeemable investee(s),
investment when determining a price          then the fair value measurement of the       including how long the restriction has
for the investment.                          investment would need to be adjusted         been in effect and an estimate of the
                                             for that risk or opportunity. However, if    time the restriction will lapse or the
The ability of a fund to provide liquidity   market participants might accept the         statement of the fact when the fund is
to its investors through subscriptions       same risks, features or other factors        unable to make an estimate. Examples
and redemptions are key considerations       relating to the investment and might         of restrictions would be lockups, gates
in evaluating whether an adjustment to       transact at the reported NAV without         and suspended redemptions.
NAV would be required. For example, if       premium or discount, those facts may        • Any other significant restrictions
the fund is an open-ended fund which         suggest that no adjustment is needed         on the ability to sell or redeem
permits investors to periodically transact   to estimate fair value.                      an investment.
in and out of the investment, market                                                     • The fair value of any portion of an
participants may accept NAV as fair                                                       investment that it is probable that it
value since it is likely they would also                                                  will be sold at an amount other than




12 Rothstein Kass
 the reported NAV, and any remaining          determining when transfers between            subsequently deemed to be inactive
 steps required to complete the sale          levels are recognized. Examples of            and disorderly, and a private operating
 or redemption.                               policies for when to recognize transfers      company that completes an initial
• Any plans or intentions to sell a group     between Levels 1 and 2 in the fair value      public offering. Although not a “bright-
 of unspecified investments that              hierarchy could include the following:        line,” industry practice has accepted
 continue to qualify for the practical                                                      10% of NAV as a starting point to
 expedient and the remaining steps            • The actual date of the event or             determine transfers that are “significant.”
 required to complete the sale.                change in circumstances that caused          Furthermore, when documenting a
                                               the transfer.                                fund’s valuation policy, fund managers
Additional disclosures should be made         • The beginning of the reporting period.      should document the procedures that
to explain the overall risks and exposures    • The end of the reporting period.            are in place to analyze the movement
to economic concentrations of the                                                           of investments between Levels.
investee funds by geographic regions,         Refer to Exhibit 2 for examples of sample
industries and types of securities. In        financial statement footnote disclosures.     Disclosures for Each “Class”
determining the appropriate major                                                           of Assets and Liabilities
categories of investments in private          (Editor’s Note: As a best practice,
investment companies, a reporting fund        we recommend that fund managers               Beginning in 2010, ASC 820 requires a
should consider the activity or business      prepare a quarterly rollforward schedule      reporting entity to provide fair value
sector, vintage, geographic concentration,    showing year-to-date transfers within all     measurement disclosures for each
credit quality and other economic             levels within the fair value hierarchy. We    “class” of assets and liabilities. Previously,
characteristics of the investee funds.        also recommend that fund managers             reporting entities were required to
                                              prepare a reconciliation from the above       disclose fair value measurement
Accounting for Transfers                      mentioned rollforward schedule to             information for its investments by “major
Between Levels                                the books and records of the fund             categories.” Many reporting entities had
                                              since auditors will usually request this      interpreted “major categories” to be
Beginning in 2010, ASC 820 requires a         information during their annual audit.        the same categories that appear in the
reporting entity to disclose the amounts      In order to prepare a complete and            statement of financial condition. While
of significant transfers between Level        accurate quarterly rollforward schedule,      ASC 820 does not specifically outline
1 and Level 2 and also requires the           fund managers must determine the level        the criteria of a class, it does provide
reporting entity to disclose the reason       designation for each investment at the        guidance as to what the components
for the transfer between Levels in the        end of each quarter.)                         of the class should entail based on the
fair value hierarchy. Significant transfers                                                 nature and risk of the assets and liabilities.
into Levels 1 and 2 are required to be        As discussed earlier, investments may
disclosed separately from transfers           be transferred between Levels during          For equity and debt securities, a fund
out of each level. As it relates to funds,    an accounting period. For example,            should determine the appropriate
significance is typically measured            certain events may give rise to a transfer    classes for those disclosures on
against the fund’s net asset value. In        between Levels in the fair value hierarchy    the basis of the nature and risks of
addition, management should disclose          such as the lifting of certain restrictions   the assets and liabilities and their
and consistently follow its policy for        on common stock, an active market             classification in the fair value hierarchy




                                                                                                              Rothstein Kass 13
(Levels 1, 2, and 3). Furthermore,         investment strategies, commodity                investment into significant concentrations
ASC 820 also requires that classes         type, derivative underlyings, and credit        [i.e. industry, geographic area, or vintage]
for equity and debt securities be          rating categories, based on the risk            in the three level hierarchy footnote
determined using major security            concentrations that a fund determines           disclosure table. As a practical matter, the
types. When preparing the fair value       to be significant and relevant to its           SOI and the footnote disclosure showing
measurement disclosure for each class      investment strategies. In determining           assets and liabilities by class should be
of assets and liabilities, we recommend    the appropriate level of disaggregation,        prepared simultaneously.)
that funds use as a starting point the     a fund should also consider disclosures
same security types for classes that       in other U.S. GAAP literature, such as          However, depending upon the amount of
are used in the condensed schedule         ASC Topic 815, Derivatives and Hedging.         a fund’s Level 3 activity during a period, the
of investments (the “SOI”). However, a     The methodology used to determine               SOI may not provide enough meaningful
fund manager may consider separating       classes under U.S. GAAP may vary                disaggregation detail for use in the Level
a particular security type into greater    across entities, but should result in           3 rollforward since the SOI represents
detail based on factors such as            increased transparency to the users             a snapshot of a fund’s investments
business sector, vintage, geographic       of the financial statements.                    and is not an activity-based disclosure.
concentration, credit quality, and                                                         Therefore, a fund may need to consider
economic characteristics. For all other    (Editors Note: We believe certain               the magnitude of rollforward activity for
assets and liabilities, judgment is        amendments to ASC 820 pertaining to             a given class to determine whether it
needed to determine the appropriate        the appropriate level of disaggregation did     merits more granular detail in the Level
classes of assets and liabilities for      not contemplate the disclosures already         3 rollforward.
which disclosures about fair value         required for investment companies in
measurements should be provided.           the SOI. When preparing the required            Refer to Exhibit 2 for examples
Depending on the nature and extent         disaggregation disclosures under U.S.           of sample financial statement
of the fund’s holdings, a greater detail   GAAP, fund managers should evaluate             footnote disclosures.
and number of classes may be more          whether the combination of the SOI
pertinent for investments classified as    disclosure requirements and the ASC 820         Disclosures About Inputs and
Level 3 due to the greater degree of       disaggregation disclosure requirements          Valuation Techniques
uncertainty and subjectivity involved      will provide sufficient transparency of the
in determining Level 3 fair value          fair value hierarchy classifications to users   ASC 820 clarifies the disclosure
measurements.                              of the financial statements. Moreover,          requirements relating to inputs and
                                           funds that disclose their investments by        valuation techniques used to measure fair
In many cases, the industry in which       major security type on the SOI should pay       value. For fair value measurements using
the issuer of a security operates will     special attention to certain investments        significant other observable inputs (Level
be a meaningful class designation to       that “cross-over” into various levels           2) and significant unobservable inputs
provide disaggregation in fair value       within the fair value hierarchy. When           (Level 3), a fund is required to disclose a
disclosures. However, other meaningful     investments shown on the SOI contains           description of the valuation technique(s)
class designations can include             material amounts of Level 2 and Level           and inputs used in determining the fair
market capitalization, geographic          3 positions, a fund manager should              values of each class of assets and
concentrations, asset class tranches,      consider bifurcating the amount of the          liabilities. In addition, a fund shall disclose




14 Rothstein Kass
changes in valuation techniques and         Other Considerations                          (Editor’s Note: The FASB decided to
the reasons for making the change.                                                        delay the effective date of disclosing
                                            Activity in Level 3 Fair
Disclosures of valuation inputs should                                                    the Level 3 rollforward on a gross basis
                                            Value Measurement
consider quantitative information about                                                   until 2011 to give entities that required
the inputs (e.g., prepayment rates,                                                       significant changes to their information
                                            Beginning in 2011, U.S. GAAP will
default rates, interest rates, discount                                                   systems adequate time to comply with
                                            change the presentation requirements
rates, and volatilities), the nature and                                                  the new standard. We recommend funds
                                            currently effective under ASC 820 relating
detailed characteristics of the item                                                      begin to evaluate the impact of this new
                                            to the Level 3 rollforward table. Under
being measured, and how third-party                                                       disclosure requirement.)
                                            the current literature, a reporting entity
information such as broker quotes,
                                            is required to disclose a reconciliation of
pricing services, net asset values and
                                            the beginning and ending balances for         Fair Value Disclosure
relevant market data was considered                                                       Requirements for Derivative
                                            significant unobservable inputs (Level
in measuring fair value.
                                            3 investments) by indicating the gains        Assets and Liabilities
                                            and losses for the period, purchases,
As a best practice, funds should review                                                   Beginning in 2010, ASC 820 requires a
                                            sales, issuances, settlements and
their disclosures for Level 2 and Level                                                   fund to provide fair value measurement
                                            transfers in and/or out of Level 3 on a
3 investments to ensure that a robust                                                     disclosures for derivative assets and
                                            net basis. The new guidance will require
description of the valuation inputs and                                                   liabilities on a gross basis. Previously,
                                            purchases, sales, issuances, settlements
methodologies used are included in the                                                    funds were permitted to present the fair
                                            and transfers in and/or out of Level 3
financial statements. In many instances,                                                  value disclosures for derivative assets
                                            to be presented on a gross basis. Total
a qualitative description of valuation                                                    and liabilities on a net basis. However,
                                            gains or losses for the period (realized
inputs may be sufficient to describe                                                      the activity of derivative assets and
                                            and unrealized) will still be permitted to
the valuation inputs used. However,                                                       liabilities included in the Level 3
                                            be presented on a net basis. Effectively,
funds should also consider disclosures                                                    rollforward continue to be permitted to
                                            significant changes in Level 3 investments
of quantitative information on valuation                                                  be presented on either a gross or net
                                            during the period will each be disclosed
inputs based on assumed market                                                            basis.
                                            separately. Furthermore, the new
participant parameters when the
                                            guidance requires the reporting entity
magnitude of subjectivity intrinsic to                                                    Refer to Exhibit 2 for examples
                                            to disclose the reasons for transfers in
the investment valuations warrant a                                                       of sample financial statement
                                            and/or out of Level 3 investments. Similar
greater degree of transparency in the                                                     footnote disclosures.
                                            to the policy requirements for transfers
disclosures. When multiple valuation
                                            between Levels 1 and 2, management
methodologies are used within an                                                          Effective Dates of New Fair
                                            should disclose and consistently follow
investment class, we recommend
                                            its policy for determining when transfers     Value Measurement and
disclosing the aggregate fair values
                                            between levels are recognized.                Disclosure Guidance
by valuation methodology utilized.

                                            Refer to Exhibit 2 for examples of sample     As discussed in our previous white paper
Refer to Exhibit 2 for examples of sample
                                            financial statement footnote disclosures.     on fair value measurements, SFAS 157
financial statement footnote disclosures.
                                                                                          was issued in September 2006 and was




                                                                                                            Rothstein Kass 15
effective for financial statements with        per Share, or Its Equivalent (issued         other premiums and discounts in a fair
fiscal years beginning after November          September 2009; effective for interim        value measurement.
15, 2007 and interim periods within those      and annual reporting periods beginning      • Disclosure of a measurement
fiscal years (the first quarter of 2008 for    after December 15, 2009).                    uncertainty analysis for Level 3
a calendar year-end fund). The fair value     • ASU 2009-05, Measuring Liabilities at       fair value measurements.
measurement and disclosure guidance            Fair Value (issued August 2009;             • Disclosure of any transfers between
contained in SFAS 157, together with any       effective for the first reporting period,    Level 1 and Level 2 of the fair value
fair value measurement and disclosure          including interim periods, beginning         hierarchy as well as any transfers in
guidance issued subsequent to the              after issuance).                             and out of Level 3.
issuance of SFAS 157, was included
in ASC 820 upon the launch of the             FASB/IASB Convergence -                      A final standard is expected to be issued
Codification in July 2009. It should be       Proposed Guidance on Fair Value              in early 2011. As of press time, there
noted that post Codification, the FASB        Measurement and Disclosure                   are many practice implementation
will no longer issue FASB Statements,                                                      issues relating to certain proposed
FASB Staff Positions (“FSPs”), FASB           On June 29, 2010, both the FASB and the      provisions of which the resolution of
Interpretations (“FINs”), or Emerging         International Accounting Standards Board     various constituent concerns is not
Issue Task Force (“EITF”) Abstracts.          (the “IASB”) (collectively “the Boards”)     yet determinable. Rothstein Kass is
New authoritative U.S. GAAP is now            released separate exposure drafts on         monitoring the progress of this topic
communicated via a new document               proposed fair value measurements             and will provide additional guidance
called an Accounting Standards                and disclosures standards with the           when the final standard is issued.
Update (“ASU”). When amendments               objective to align U.S. GAAP and IFRS.
to the Codification contained in an           In the FASB exposure draft, the FASB
ASU become effective, the Codification        has proposed certain amendments to
guidance is updated. The following fair       ASC 820 that would change fair value
value measurement and disclosure ASU’s        measurement principles and disclosures.
were issued by the FASB subsequent to         These proposed amendments may result
the launch of the Codification:               in additional changes in the way funds
                                              prepare their financial statements.
• ASU 2010-06, Improving Disclosures
 About Fair Value Measurement (issued         Proposed Changes
 January 2010; effective for interim and      The more notable of those proposed
 annual reporting periods beginning           amendments to U.S. GAAP include
 after December 15, 2009, except for          the following:
 disclosures of gross activity in the Level
 3 rollforward which will be effective for    • Highest and best use valuation premise.
 fiscal years beginning after December        • Measuring the fair value of financial
 15, 2010).                                    instruments that are managed within
• ASU 2009-12, Investments in Certain          a portfolio.
 Entities That Calculate Net Asset            • Application of blockage factors and




16 Rothstein Kass
Exhibit 1
Matrix of Levels and Typical Level Designations

                     Level                                           Types of Inputs                              Types of Investments (Note 1)

 Level 1 - Valuations based on quoted                 Unadjusted quoted prices from an exchange               Exchange-traded securities, most U.S.
 prices in active markets for identical assets        or broker-dealer market that is deemed to               government securities, certain other
 or liabilities.                                      be active.                                              sovereign government securities, listed
                                                                                                              derivatives, futures contracts and over-
                                                                                                              the-counter (“OTC”) securities traded in
                                                                                                              an active market.

 Level 2 - Valuations based on quoted                 Adjusted prices from an exchange or                     Exchange-traded securities (Note 3)
 prices in markets that are not active or for         broker-dealer market that is deemed to                  and listed derivatives that are not actively
 which all significant inputs are observable,         be inactive, brokered markets for restricted            traded, most OTC derivatives, restricted
 either directly or indirectly.                       securities, registered debt and observable              stock, corporate and municipal bonds,
                                                      market inputs, such as equity prices, yield             certain corporate loans, certain high-yield
                                                      curves, implied volatility, interest rates,             debt, certain residential and commercial
                                                      prepayment speeds, loss severities, credit              mortgage loans, certain mortgage-backed
                                                      risks, and default rates (including those inputs        securities (“MBS”), asset-backed securities
                                                      extrapolated from other observable inputs).             (“ABS”), and collateralized debt obligation
                                                      (Note 2)                                                (“CDO”) securities, investments in certain
                                                                                                              private investment companies, futures and
                                                                                                              forward contracts, physical commodities,
                                                                                                              and certain deferred fee arrangements.

 Level 3 - Valuations based on inputs that            Models utilizing significant inputs that are            Certain corporate loans, certain mortgage
 are not observable and significant to the            unobservable (e.g., historical volatilities), such      loans, certain high-yield debt, distressed
 overall fair value measurement.                      as Black-Scholes, discounted cash flows,                debt (i.e., securities of issuers encountering
                                                      multiples of earnings or EBITDA including risk          financial difficulties, including bankruptcy
                                                      assumptions consistent with what market                 or insolvency), certain MBS, ABS and CDO
                                                      participants would use to arrive at fair value.         securities, investments in real estate funds
                                                                                                              and certain private investment companies,
                                                                                                              private equity investments, complex OTC
                                                                                                              derivatives (including certain foreign
                                                                                                              currency options, long-dated commodity
                                                                                                              options and swaps, certain mortgage-
                                                                                                              related credit default swaps, derivative
                                                                                                              interests in mortgage-related CDOs, and
                                                                                                              basket credit default swaps), and certain
                                                                                                              deferred fee arrangements.




 Note 1 - Level designations within the fair value hierarchy are based on the lowest level input that is significant to an investment’s fair value measurement.
 Actual level designations of an investment may vary from the examples illustrated above based on individual facts and circumstances.
 Note 2 - For Level 2 designations, any models used must be widely accepted, non-proprietary and the data used must be observable. Any significant judgments
 or adjustments to the model or data will likely result in a Level 3 designation. In addition, quotes from brokered markets must represent a firm commitment to
 transact or are developed from other observable market data.
 Note 3 - Exchange-traded securities that are traded in an inactive and disorderly market or the prices from the exchange are adjusted due to aftermarket
 events would generally be assigned a Level 2 designation.




                                                                                                                                   Rothstein Kass 17
Exhibit 2                                          developed based on the best information      represent the amounts that may be
                                                   available in the circumstances. The fair     ultimately realized due to the occurrence
Sample Financial Statement
                                                   value hierarchy is categorized into three    of future circumstances that cannot be
Footnote Disclosures                               levels based on the inputs as follows:       reasonably determined. Because of the
                                                                                                inherent uncertainty of valuation, those
The illustrative financial statement footnote
                                                   Level 1 - Valuations based on unadjusted     estimated values may be materially
disclosures that follow have taken into
                                                   quoted prices in active markets for          higher or lower than the values that
consideration the requirements outlined
                                                   identical assets or liabilities that the     would have been used had a ready
in ASC 820. Level designation within the
                                                   Fund has the ability to access. Valuation    market for the investments existed.
fair value hierarchy should be based on
                                                   adjustments are not applied to Level 1       Accordingly, the degree of judgment
the lowest level input that is significant to
                                                   investments. Since valuations are based      exercised by the Fund in determining
the fair value measurement of the security
                                                   on quoted prices that are readily and        fair value is greatest for investments
and may vary from the designations
                                                   regularly available in an active market,     categorized in Level 3.
illustrated in the disclosures below.
                                                   valuation of these investments does not

Significant Accounting                             entail a significant degree of judgment.     In certain cases, the inputs used to

Policy Footnotes                                                                                measure fair value may fall into different
                                                   Level 2 - Valuations based on quoted         levels of the fair value hierarchy. In such
Fair Value - Definition and Hierarchy              prices in markets that are not active        cases, for disclosure purposes, the level
Fair value is defined as the price that            or for which all significant inputs are      in the fair value hierarchy within which
would be received to sell an asset or paid         observable, either directly or indirectly.   the fair value measurement falls in its
to transfer a liability (i.e., the “exit price”)                                                entirety is determined based on the
in an orderly transaction between market           Level 3 - Valuations based on inputs that    lowest level input that is significant to
participants at the measurement date.              are unobservable and significant to the      the fair value measurement.
                                                   overall fair value measurement.
In determining fair value, the Fund uses                                                        Fair value is a market-based measure
various valuation approaches. A fair value         The availability of valuation techniques     considered from the perspective of
hierarchy for inputs is used in measuring          and observable inputs can vary from          a market participant rather than an
fair value that maximizes the use of               investment to investment and are             entity-specific measure. Therefore,
observable inputs and minimizes the use            affected by a wide variety of factors,       even when market assumptions are
of unobservable inputs by requiring that           including the type of investment,            not readily available, the Fund’s own
the most observable inputs are to be               whether the investment is new and not        assumptions are set to reflect those
used when available. Observable inputs             yet established in the marketplace, and      that market participants would use
are those that market participants would           other characteristics particular to the      in pricing the asset or liability at the
use in pricing the asset or liability based        transaction. To the extent that valuation    measurement date. The Fund uses
on market data obtained from sources               is based on models or inputs that are        prices and inputs that are current as
independent of the Fund. Unobservable              less observable or unobservable in           of the measurement date, including
inputs reflect the Fund’s assumptions              the market, the determination of fair        periods of market dislocation. In
about the inputs market participants               value requires more judgment. Those          periods of market dislocation, the
would use in pricing the asset or liability        estimated values do not necessarily          observability of prices and inputs may




18 Rothstein Kass
be reduced for many investments. This         To the extent these securities are actively   inputs, including, where applicable,
condition could cause an investment to        traded and valuation adjustments are          time value, implied volatility, equity
be reclassified to a lower level within the   not applied, they are categorized in Level    and commodity prices, interest rate
fair value hierarchy.                         1 of the fair value hierarchy. Securities     yield curves, prepayment speeds,
                                              traded on inactive markets or valued          interest rates, loss severities, credit
Fair Value - Valuation Techniques             by reference to similar instruments are       risks, credit curves, default rates and
and Inputs                                    generally categorized in Level 2 of the       currency rates. Certain pricing models
                                              fair value hierarchy.                         do not entail material subjectivity as
Investments in Securities and                                                               the methodologies employed include
Securities Sold Short                         Derivative Contracts                          pricing inputs that are observed from
The Fund values investments in securities     The Fund records its derivative activities    actively quoted markets. In the case of
and securities sold short that are freely     at fair value. Gains and losses from          more established derivative contracts,
tradable and are listed on a national         derivative contracts are included in net      the pricing models used by the Fund
securities exchange or reported on            gain (loss) from derivative contracts in      are widely accepted by marketplace
the NASDAQ national market at their           the statement of operations. Derivative       participants. OTC derivatives contracts
last reported sales price as of the           contracts include forward, futures, swap      (such as forward and swap contracts)
valuation date.                               and option contracts related to interest      which may be valued using models,
                                              rates, foreign currencies, credit standing    depending on whether significant inputs
Many OTC contracts have bid and               of reference entities, and equity prices      are observable or unobservable, are
ask prices that can be observed in            or commodity prices.                          categorized in Levels 2 or 3 of the fair
the marketplace. Bid prices reflect                                                         value hierarchy.
the highest price that the marketplace        Derivative contracts, such as options
participants are willing to pay for an        and futures, which are listed on a            Investments in credit default swaps
asset. Ask prices represent the lowest        national securities exchange or reported      are valued using pricing models widely
price that the marketplace participants       on the NASDAQ national market, are            accepted by marketplace participants.
are willing to accept for an asset. For       generally categorized in Level 1 of the       The pricing models take into account the
securities whose inputs are based on          fair value hierarchy.                         contract terms (including maturity), time
bid-ask prices, the Fund’s valuation                                                        value, credit curves, recovery rates, and
policies do not require that fair value       Depending on the underlying security          current credit spreads obtained from
always be a predetermined point in the        and the terms of the transaction,             swap counterparties and other market
bid-ask range. The Fund’s policy for          the fair value of certain derivatives         participants. At December 31, 20XX,
securities traded in the OTC markets          may be able to be modeled using               investments in credit default swaps had
and listed securities for which no sale       a series of techniques, including             maturities within a range of X and XX
was reported on that date are generally       closed-form analytic formula (such            years, and were valued using recovery
valued at their last reported bid price       as the Black-Scholes option-pricing           rates with a range of XX% and XX%, and
if held long, and last reported ask           model), simulation models, or a               current credit spreads within a range of
price if sold short.                          combination thereof. Pricing models           XXX and X,XXX basis points.
                                              take into account the contract terms
                                              (including maturity) as well as multiple




                                                                                                               Rothstein Kass 19
Government Bonds                             spreads, and recovery rates based on          absence of market prices, are valued
The fair value of sovereign government       collateral values as key inputs. Corporate    as a function of observable whole bond
bonds is generally based on quoted           bonds are generally categorized in Level      prices and cash flow values of principal-
prices in active markets. When quoted        2 of the fair value hierarchy. In instances   only bonds using current market
prices are not available, fair value is      where significant inputs are unobservable,    assumptions at the measurement date.
determined based on a valuation model        they are categorized in Level 3 of the fair   CMBS and ABS are categorized in
that uses inputs that include interest       value hierarchy.                              Level 2 of the fair value hierarchy when
rate yield curves, cross-currency                                                          external pricing data is observable and
basis index spreads, and sovereign           Bank Debt                                     in Level 3 when external pricing data
credit spreads similar to the bond in        The fair value of bank debt is generally      is unobservable.
terms of issuer, maturity and seniority.     valued using recently executed
Sovereign government bonds are               transactions, market price quotations         At December 31, 20XX, the Fund
generally categorized in Levels 1 or         (where observable) and market                 had investments in ABS with a fair
2 of the fair value hierarchy.               observable credit default swap levels.        value of approximately $XX,XXX,000
                                             When quotations are unobservable,             which are included in Level 3 of the
Municipal Bonds                              proprietary valuation models and              fair value hierarchy. These securities
The fair value of municipal bonds is         default recovery analysis methods are         represent mezzanine and equity tranches
estimated using recently executed            employed, utilizing default rates within      in various securitization trusts. The
transactions, market price quotations        a range of X.X% to X.X%, recovery             underlying loans for these securities
and pricing models that factor in, where     rates within a range of X.X% to X.X%,         include small business loans and credit
applicable, interest rates, bond or credit   and loss rates within a range of X.X%         card receivables that were originated
default swap spreads and volatility.         to X.X%. Bank debt is categorized in          between 200X and 201X. The underlying
Municipal bonds are generally categorized    Levels 2 or 3 of the fair value hierarchy.    small business loans and credit card
in Level 2 of the fair value hierarchy.                                                    receivables have respective weighted-
                                             Commercial Mortgage-Backed                    average coupon rates of X.X% and
Corporate Bonds                              Securities (CMBS) and Asset-Backed            X.X% and weighted-average maturities
The fair value of corporate bonds is         Securities (ABS)                              of X and XX years. To estimate their fair
estimated using recently executed            CMBS and ABS may be valued based              value, the Fund uses a cash flow model.
transactions, market price quotations        on external price/spread data. When           The significant inputs used for the cash
(where observable), bond spreads, or         position-specific external price data         flow model include the following inputs:
credit default swap spreads. The spread      is not observable, the valuation is
data used is for the same maturity as        either based on prices of comparable                          Mezzanine        Equity
                                                                                                           (Tranches)     (Tranches)
the bond. If the spread data does not        securities or cash flow models that
                                                                                           Yields to      X.X% - X.X%    X.X% - X.X%
reference the issuer then data that          consider inputs including default rates,      Maturity
references a comparable issuer is used.      conditional prepayment rates, loss            Default        X.X% - X.X%    X.X% - X.X%
                                                                                           Rates
When observable price quotations are not     severity, expected yield to maturity, and
                                                                                           Loss           X.X% - X.X%    X.X% - X.X%
available, fair value is determined based    other inputs specific to each security.       Severities
on cash flow models using yield curves,      Included in this category are certain         Prepayment     X.X% - X.X%    X.X% - X.X%
bond or single name credit default swap      interest-only securities, which in the        Rates




20 Rothstein Kass
Investments in Private                      Investments valued using an income             At December 31, 20XX, the approximate
Operating Companies                         approach utilized discount rates within a      fair values of the Fund’s investments in
The Fund’s investments in private           range of XX% to XX%. Additional inputs         private operating companies, by valuation
operating companies consist of direct       relied upon in this approach include           methodology, are as follows:
private common and preferred stock          annual projected cash flows for each
(together or individually “equity”)         investment through their respective             Third Party Transactions   $    X,XXX,000
investments. The transaction price,         investment horizons. These cash flow
                                                                                            Income Approach            $    X,XXX,000
excluding transaction costs, is typically   assumptions may be probability-weighted
the Fund’s best estimate of fair value      to reflect the risks associated with            Market Approach            $    X,XXX,000
at inception. When evidence supports        achieving expected performance levels           Blended Approach           $    X,XXX,000
a change to the carrying value from         across various business scenarios.
the transaction price, adjustments are      Under the income approach, the
made to reflect expected exit values in     privately-held nature of an investment         Investments in Restricted Securities of
the investment’s principal market under     may be reflected in the magnitude of           Public Companies
current market conditions. Ongoing          the selected range of discount rates or        Investments in restricted securities
reviews by the Fund’s management            through application of separate liquidity      of public companies cannot be
are based on an assessment of trends        discounts within a range of XX% to XX%.        offered for sale to the public until the
in the performance of each underlying                                                      Fund complies with certain statutory
investment from the inception date          Investments valued using a market              requirements. The valuation of the
through the most recent valuation date.     approach utilized valuation multiples          securities by management takes into
These assessments typically incorporate     within a range of X.X and X.X times            consideration the type and duration
valuation methodologies that consider       the annual earnings before interest,           of the restriction, but in no event does
the evaluation of arm’s length financing    taxes, depreciation and amortization           the valuation exceed the listed price on
and sale transactions with third parties,   (“EBITDA”), or another performance             a national securities exchange or the
an income approach reflecting a             metric such as revenues or net earnings.       NASDAQ national market. Investments
discounted cash flow analysis, and          The selected valuation multiples were          in restricted securities of public
a market approach that includes a           estimated through a comparative analysis       companies are generally included in
comparative analysis of acquisition         of the performance and characteristics         Level 2 of the fair value hierarchy. At
multiples and pricing multiples             or each investment within a range of           December 31, 20XX, investments in
generated by market participants. In        comparable companies or transactions           restricted securities of public companies
certain instances the Fund may use          in the observable marketplace. In addition,    of approximately $XX,XXX,000 were
multiple valuation methodologies for        the Fund generally applies liquidity           valued using liquidity discounts within
a particular investment and estimate        discounts within a range of XX% to XX%,        a range of XX% to XX%.
its fair value based on a weighted          and control premiums within a range
average or a selected outcome within        of XX% to XX%, dependant upon the
a range of multiple valuation results.      characteristics of the individual investment
These investments in private operating      and its respective marketplace.
companies are generally included in
Level 3 of the fair value hierarchy.




                                                                                                             Rothstein Kass 21
Investments in Private                        length of time until the investment
Investment Companies                          is redeemable, including notice and
Investments in private investment             lock-up periods or any other restriction
companies are valued, as a practical          on the disposition of the investment.
expedient, utilizing the net asset            The Fund also considers the nature of
valuations provided by the underlying         the portfolios of the underlying private
private investment companies, without         investment companies and their ability
adjustment, when the net asset                to liquidate their underlying investments.
valuations of the investments are             If the Fund has the ability to redeem its
calculated (or adjusted by the Fund if        investment at the reported net asset
necessary) in a manner consistent with        valuation as of the measurement date,
U.S. GAAP for investment companies.           the investment is generally included in
The Fund applies the practical expedient      Level 2 of the fair value hierarchy. If the
to its investments in private investment      Fund does not know when it will have
companies on an investment-by-                the ability to redeem the investment or
investment basis, and consistently with       it does not have the ability to redeem
the Fund’s entire position in a particular    its investment in the near term, the
investment, unless it is probable that the    investment is included in Level 3 of
Fund will sell a portion of an investment     the fair value hierarchy.
at an amount different from the net
asset valuation. If it is probable that       Note X — Fair Value Measurements
the Fund will sell an investment at an        The Fund’s assets and liabilities
amount different from the net asset           recorded at fair value have been
valuation or in other situations where        categorized based upon a fair value
the practical expedient is not available,     hierarchy as described in the Fund’s
the Fund considers other factors in           significant accounting policies in
addition to the net asset valuation,          Note 1. The following tables present
such as features of the investment,           information about the Fund’s assets
including subscription and redemption         and liabilities measured at fair value as
rights, expected discounted cash flows,       of December 31, 2010 (in thousands):
transactions in the secondary market,
bids received from potential buyers,
and overall market conditions in its
determination of fair value.


Investments in private investment
companies are included in Level 2 or 3
of the fair value hierarchy. In determining
the level, the Fund considers the




22 Rothstein Kass
                    Assets (at fair value)              Level 1               Level 2               Level 3               Total

Investments in securities
 Common stocks
  United States
      Banking                                       $       117,089       $                     $                     $      117,089
      Manufacturing                                          94,447                                                           94,447
      Consumer discretionary                                 87,491                     2,191                                 89,682
      Health care                                            81,038                                                           81,038
      Real estate                                            44,961                                                           44,961
  United Kingdom
      Manufacturing                                          38,571                                                           38,571
      Telecommunications                                     33,642                      462                                  34,104
 Preferred stocks                                            96,000                      600                                  96,600
 Exchange traded funds                                       19,567                                                           19,567
 Private preferred stocks                                                                                18,541               18,541
 Corporate bonds                                                                   59,481                 2,584               62,065
 Government bonds                                            22,391                                                           22,391
 Municipal bonds                                                                   31,534                                     31,534
 Asset-backed securities
    Senior debt                                                                     1,273                 19,159              20,432
    Mezzanine debt                                                                                        9,518                    9,518
Total investments in securities                             635,197                95,541                49,802              780,540
Investments in private investment companies
 Value                                                                             72,424                                     72,424
 Growth
   North America                                                                   53,909                                     53,909
   Asia                                                                                                       1,191                1,191
 Merger arbitrage
   North America                                                                                         23,339               23,339
   Europe                                                                           1,460                                         1,460
 Private equity                                                                                          38,223               38,223
Total investments in private investment companies                                 127,793                62,753              190,546
Derivative contracts
 Interest rate swaps                                                               60,439                                     60,439
 Call warrants                                                                     45,193                 1,879                   47,072
 Total return swaps                                                                 30,111                1,396               31,507
 Call options                                                23,807                                                           23,807
 Put options                                                      2,159                                                            2,159
Total derivative contracts                                   25,966               135,743                 3,275              164,984
Securities purchased under agreements to resell                                    12,450                                     12,450
Cash equivalents                                              3,567                                                               3,567
                                                    $       664,730       $       371,527       $       115,830       $     1,152,087




                                                                                                                Rothstein Kass 23
                  Liabilities (at fair value)           Level 1               Level 2               Level 3               Total



  Securities sold short
   Common stocks                                   $         510,581      $             4,653   $                     $       515,234
   Preferred stocks                                           34,194                    1,003                                     35,197
  Total securities sold short                                544,775                    5,656                                550,431
  Derivative contracts
   Credit default swaps                                                             23,839                    1,838               25,677
   Total return swaps                                                               24,660                                        24,660
   Interest rate swaps                                                              23,112                                        23,112
   Contracts for differences                                                        22,384                                        22,384
   Forward contracts                                                                22,072                                        22,072
   Futures contracts                                          21,879                                                              21,879
   Call options                                                   9,960                                                            9,960
   Put options                                                    5,691                                                            5,691
  Total derivative contracts                                  37,530               116,067                    1,838           155,435
                                                   $         582,305      $        121,723      $             1,838   $      705,866



(Editors Note: When considering disaggregating assets and liabilities by “class,” we recommend using line items contained in
the condensed schedule of investments (“SOI”) as a starting point. If one of the line items in the SOI contain significant amounts
in more than one hierarchy level, further disaggregation would be required. The example above assumes significant amounts of
common stock in Level 1 and 2 and asset-backed securities in Level 2 and 3.)




24 Rothstein Kass
Significant transfers into and out of each level of the fair value hierarchy for assets measured at fair value for the year ended
December 31, 2010 (in thousands) were as follows:




                                     Transfers         Transfers          Transfers         Transfers          Transfers         Transfers
      Assets (at fair value)            into            (out) of             into            (out) of             into            (out) of
                                      Level 1           Level 1            Level 2           Level 2            Level 3           Level 3


  Investments in securities
   Common stocks                 $        39,019   $        (8,412)   $         8,412   $       (39,019)   $                 $
   Preferred stocks                       10,438                                                (10,438)
   Exchange traded funds
   Private preferred stocks
   Corporate bonds                                                              1,926            (4,510)             4,510            (1,926)
   Government bonds
   Municipal bonds
   Asset-backed securities
  Total investments
                                          49,457            (8,412)            10,338          (53,967)              4,510            (1,926)
  in securities
  Investments in private
                                                                               67,895                                                (67,895)
  investment companies
  Derivative contracts
   Interest rate swaps
   Call warrants                                                                6,616            (1,467)             1,467            (6,616)
   Total return swaps
   Call options
   Put options
  Total derivative contracts                                                    6,616            (1,467)             1,467            (6,616)
  Securities purchased under
  agreement to resell

                                 $        49,457   $        (8,412)   $       84,849    $      (55,434)    $         5,977   $      (76,437)




                                                                                                                    Rothstein Kass 25
Significant transfers into and out of each level of the fair value hierarchy for liabilities measured at fair value for the year ended
December 31, 2010 (in thousands) were as follows:




                                      Transfers        Transfers         Transfers         Transfers         Transfers         Transfers
    Liabilities (at fair value)          into           (out) of            into            (out) of            into            (out) of
                                       Level 1          Level 1           Level 2           Level 2           Level 3           Level 3


  Securities sold short
   Common stocks                  $                $                 $                 $                 $                 $
   Preferred stocks

  Total securities sold short

  Derivative contracts
   Credit default swaps                                                                          (562)              562
   Total return swaps
   Interest rate swaps
   Contracts for differences
   Forward contracts
   Futures contracts
   Call options
   Put options
  Total derivative contracts                                                                     (562)              562
                                  $                $                 $                 $         (562)   $          562    $



All transfers are recognized by the Fund at the end of each reporting period.


Transfers between Levels 1 and 2 generally relate to whether a market becomes active or inactive. Transfers between Levels 2
and 3 generally related to whether, for various reasons, significant inputs become observable or unobservable. See Note 1 for
additional information related to the fair value hierarchy and valuation techniques.




26 Rothstein Kass
The following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and
unobservable inputs may be used to determine the fair value of positions that the Fund has classified within the Level 3 category.
As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair value
that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.


Changes in Level 3 assets measured at fair value for the year ended December 31, 2010 (in thousands) were as follows:



                                                                       Level 3

                                                                                                                                 Change in
                                                                                                                                 Unrealized
                                                                                            Net Transfers
                                     Beginning        Realized &          Purchases,                         Ending Balance    Gains (Losses)
                                                                                             into and/or
      Assets (at fair value)          Balance         Unrealized           Sales and                          December 31,    for Investments
                                                                                               (out) of
                                   January 1, 2010   Gains (Losses)       Settlements                             2010          still held at
                                                                                               Level 3
                                                                                                                               December 31,
                                                                   (a)                                                              2010      (b)
  Investments in securities
   Common stocks                   $                 $                   $                  $                $                $
   Preferred stocks
   Exchange traded funds
   Private preferred stocks                                 (1,459)               20,000                            18,541             (1,459)
   Corporate bonds                                                                                  2,584            2,584                 547
   Government bonds
   Municipal bonds
   Asset-backed securities                 17,319           34,910               (23,552)                           28,677             12,481
  Total investments
                                           17,319           33,451                (3,552)           2,584           49,802             11,569
  in securities
  Investments in private
                                          109,672           (9,024)               30,000          (67,895)          62,753               1,391
  investment companies
  Derivative contracts
   Interest rate swaps
   Call warrants                            2,934            4,094                                 (5,149)           1,879               (562)
   Total return swaps                       5,190          (41,209)               37,415                             1,396             (1,834)
   Call options
   Put options
  Total derivative contracts                8,124           (37,115)              37,415           (5,149)           3,275             (2,396)
  Securities purchased
  under agreement to resell
                                   $      135,115    $     (12,688)       $       63,863    $     (70,460)    $    115,830     $       10,564




                                                                                                                     Rothstein Kass 27
Changes in Level 3 liabilities measured at fair value for the year ended December 31, 2010 (in thousands) were as follows:


                                                                      Level 3

                                                                                                                           Change in
                                                                                      Net Transfers                    Unrealized Gains
                                   Beginning        Realized &          Purchases,                    Ending Balance
                                                                                       into and/or                        (Losses) for
   Liabilities (at fair value)      Balance         Unrealized           Sales and                     December 31,
                                                                                         (out) of                       Investments still
                                 January 1, 2010   Gains (Losses)       Settlements                        2010
                                                                                         Level 3                       held at December
                                                                                                                            31, 2010
                                                                (a)                                                                    (b)

  Securities sold short
   Common stocks                 $                 $                   $              $               $                 $
   Preferred stocks
  Total securities
  sold short
  Derivative contracts
   Credit default swaps                   8,719           (7,443)                              562            1,838                (418)
   Total return swaps
   Interest rate swaps
   Contracts for differences
   Forward contracts
   Futures contracts
   Call options
   Put options
  Total derivative contracts              8,719           (7,443)                              562            1,838                (418)

                                  $       8,719    $      (7,443)      $              $        562     $      1,838     $          (418)




(a) Realized and unrealized gains and losses are all included in net gain (loss) on investments in the statement of operations.
(b) The change in unrealized gains (losses) for the year ended December 31, 2010 for investments still held at December 31, 2010
   are reflected in the net change in unrealized appreciation or depreciation on securities, net change in unrealized appreciation
   or depreciation on private investment companies, and net gain (loss) from derivative contracts in the statement of operations.




28 Rothstein Kass
The following footnote disclosure is a sample of a “gross” presentation of the Level 3 rollforward. This footnote disclosure is
required for periods beginning after December 15, 2010 (calendar year-end 2011 funds); however, early adoption is encouraged.


Changes in Level 3 assets measured at fair value for the year ended December 31, 2010 (in thousands) were as follows:


                                                                           Level 3

                                                                                                                                             Change in
                                                                                                                                             Unrealized
                           Beginning     Realized &                                                                            Ending           Gains
                                                                                                   Transfers   Transfers
                            Balance      Unrealized                                                                            Balance      (Losses) for
  Assets (at fair value)                                Purchases        Sales       Settlements      into      (out) of
                            January         Gains                                                                             December      Investments
                                                                                                    Level 3     Level 3
                             1, 2010      (Losses)                                                                             31, 2010      still held at
                                                                                                                                             December
                                                                                                                                              31, 2010

  Investments in
  securities
   Common stocks           $             $              $            $               $             $           $               $            $
   Preferred stocks
   Exchange traded
   funds
   Private preferred
                                              (1,459)       20,000                                                                 18,541         (1,459)
   stocks
   Corporate bonds                                                                                     4,510        (1,926)         2,584            547
   Government bonds
   Municipal bonds
   Asset-backed
                                17,319        34,910         2,451       (26,003)                                                  28,677         12,481
   securities
  Total investments
                                17,319        33,451        22,451       (26,003)                      4,510        (1,926)        49,802         11,569
  in securities
  Investments in
  private investment           109,672        (9,024)       34,000        (4,000)                                  (67,895)        62,753          1,391
  companies
  Derivative contracts
   Interest rate swaps
   Call warrants                 2,934         4,094                                                   1,467        (6,616)         1,879           (562)
   Total return swaps            5,190       (41,209)                                     37,415                                    1,396         (1,834)
   Call options
   Put options
  Total derivative
                                 8,124       (37,115)                                     37,415       1,467        (6,616)         3,275         (2,396)
  contracts
  Securities purchased
  under agreement
  to resell
                           $ 135,115     $ (12,688)     $ 56,451     $ (30,003)       $   37,415   $   5,977   $ (76,437)      $ 115,830     $    10,564




                                                                                                                              Rothstein Kass 29
Exhibit 3                                       8. Are the fair value disclosure                 large bid-ask spread from a broker-
                                                  requirements in ASC 820 required for           dealer that has provided a legal
Frequently Asked Questions
                                                  feeder funds whose sole investment             disclaimer on the quote?
                                                  is in a master fund?
General Questions
                                                                                              16. When a fund receives multiple
                                                9. Should a fund record its debt facility        indicative broker-dealer quotes,
1. Are there any differences between the
                                                  at fair value and disclose the debt per        are the quotes considered to be
  fair value measurement and disclosures
                                                  the requirements of ASC 820?                   observable or unobservable?
  guidance under previous U.S. GAAP
  in SFAS 157 and the codified guidance
                                                10. How does nonperformance risk              17. What would the level designation
  under current U.S. GAAP in ASC 820?
                                                    impact the fair value measurement            be for securities that rely on
                                                    of derivatives?                              indicative broker-dealer quotes
2. If a fund changes its valuation
                                                                                                 with legal disclaimers?
  methodology for a certain investment,
                                                11. What factors should funds consider
  when is the adjustment to the fair value
                                                    when applying the fair value premise      Fair Value Hierarchy-
  of the investment recorded?
                                                    to liability instruments?                 Level 1 Considerations
3. When is the use of a valuation model
                                                12. Are repurchase agreements and             18. How does a fund determine the
  to determine fair value acceptable
                                                    reverse repurchase agreements                principal or most advantageous
  under ASC 820?
                                                    required to be disclosed in the              market?
                                                    fair value hierarchy level tabular
4. If there are multiple valuation
                                                    disclosure?                               19. A fund purchases a security on
  techniques available, how does a
                                                                                                 Exchange A. The security is traded
  fund determine the most appropriate
                                                Third Party Pricing/Broker-                      on both Exchange A and B.
  valuation technique under ASC 820?
                                                Dealer Quotations                                Exchange B has more liquidity
                                                                                                 and is more active than Exchange
5. What are the recognition guidelines
                                                13. Where does pricing from recognized           A. Does the fund determine the
  for transfers between levels in the fair
                                                    third party pricing services and             fair value of the security using
  value hierarchy?
                                                    broker-dealers fall within the three-        Exchange A or B prices?
                                                    level hierarchy?
6. What is the consequence when a
                                                                                              20. How can a fund determine, in
  fund assigns incorrect levels to its
                                                14. If a fund receives broker-dealer             quantitative terms, the definition
  investments according to the fair
                                                    quotes from multiple broker-dealers,         of an active market?
  value hierarchy?
                                                    can an average of the broker-dealer
                                                    quotes be used to arrive at fair value?   21. For exchange-traded equities, can
7. Are the fair value disclosure requirements
                                                                                                 a fund use the consolidated tape to
  in ASC 820 reported on the condensed
                                                15. What level designation would a fund          price the securities?
  schedule of investments or in the
                                                    assign to an investment where the
  footnotes to the financial statements?
                                                    fund can only get one quote with a




30 Rothstein Kass
22. Block Discounts — Can a fund take         29. In an illiquid market (such as the           measurement and the use of NAV as
    a “haircut” off the price of a position      asset-backed security market)                 a practical expedient?
    in a small cap company?                      there can be a disconnect between
                                                 the intrinsic value (e.g., the value       34. What fair value hierarchy level
23. Is a fund required to disaggregate           determined by applying data                   designation would a fund assign
    Level 1 investments in the footnotes to      inputs to a valuation which may               to an investment in a private
    the financial statements by industry or      presume the position would be held            investment company when the
    geographic concentrations if Level 1         to maturity) and what the current             private investment company has
    investments are already disclosed on         quoted observable prices are for              a portion of its investment held in
    the SOI?                                     the security in the marketplace.              a side-pocket?
                                                 Can the intrinsic value be used in
Fair Value Hierarchy—Level 2 and                 lieu of the quoted prices when the         35. How does a fund conclude that
Level 3 Considerations                           current market is not active and              NAV, as most recently reported
                                                 therefore has unusually large bid-            by the investee fund manager, has
24. Should a discount be taken when              ask spreads?                                  been calculated according to the
    determining the fair value of a                                                            measurement principles of ASC 946?
    restricted stock?                         30. If there are no recent transactions
                                                 for an asset-backed security and a         36. What should a fund consider as
25. Is it appropriate for a fund to adopt        fund uses matrix pricing comparing            part of the requirement to disclose
    a policy of applying a standard              asset-backed securities that have             information about the inputs and
    discount rate to its investments (i.e.,      similar attributes and vintages,              valuation techniques for Level 2
    restricted stock or private investments      or a fund uses the ABX credit-                and 3 measurements?
    in public equity (PIPEs)) when               derivative index to price the security,
    measuring fair value?                        what would be the resulting level          Fair Value Hierarchy—Level 3
                                                 designation for these approaches?          Considerations-Investments in
26. Are total return swaps where the                                                        Private Operating Companies
    underlying notional position is an        31. What level designation should a fund
    actively traded security (i.e., Level        assign to a deferred fee liability which   37. For an investment in private operating
    1 security) considered Level 1 or            is reinvested into the fund?                  companies, how does a recent round
    Level 2?                                                                                   of financing factor into the fair value
                                              32. When is it appropriate to designate          inputs in arriving at fair value, as well
27. Where do options fall within the fair        a fund of funds investment in a               as the level designation within the fair
    value hierarchy?                             private investment company as                 value hierarchy?
                                                 a Level 2 investment in the fair
28. What is the level designation in the         value hierarchy?                           38. Should transaction costs associated
    fair value hierarchy for (PIPEs)                                                           with the acquisition of an investment
    including the warrants typically          33. How does the probable sale of an             be capitalized into the cost of the
    attached to those transactions?              investment for an amount other than           investment or expensed as incurred?
                                                 NAV affect the investment’s fair value




                                                                                                             Rothstein Kass 31
39. For a private loan receivable, does     the sole source for guidance on how            instances (e.g., elimination of blockage
   ASC 820 require an adjustment to         entities should measure and disclose fair      discounts), adjustments to the fair value
   the “fair value” based on movements      value in their financial statements. ASC       of the investment as a result of a change
   of interest rates for similar loans in   820 includes (1) the original guidance         in the valuation methodology will be
   the marketplace (even though the         contained in SFAS 157, as amended,             recorded in the current accounting
   underlying credit of the borrower has    and (2) new fair value measurement             period ending on the valuation date of
   not deteriorated)?                       and disclosure pronouncements issued           the investment.
                                            subsequent to the release of SFAS 157.
40. Can a fund rely on other disclosures    The goal of SFAS 157 was to provide a          3. When is the use of a valuation
   within the financial statements in       framework to increase consistency in             model to determine fair value
   lieu of applying the disaggregation      developing fair value measures as well           acceptable under ASC 820?
   requirements to the disclosure of the    as provide greater transparency to
   Level 3 rollforward?                     investors through increased disclosure         In most cases, the use of a valuation
                                            in financial statements. ASC 820 retains       model to determine fair value is acceptable
41. What is the expected impact of the      that framework and requires the following      only when quoted prices representing
   proposed disclosure requirement of a     for financial statement preparers:             orderly transactions in active markets
   measurement uncertainty analysis for                                                    are not available. The inputs used in
   Level 3 investments?                     • Use of a three-level fair value hierarchy.   the valuation model should include the
                                            • No blockage discounts allowed for            assumptions that market participants
Frequently Asked                             Level 1 investments.                          would use in pricing the asset in a
Questions                                   • Increased financial statement                current transaction even if the market
                                             disclosures.                                  participants’ assumptions are different
General Questions                           • Requirement to determine the principal       from the fund’s inputs. A fund cannot
                                             market or most advantageous market.           ignore market data typically used by
1. Are there any differences between        • Use of market-based assumptions              market participants. The best practice
  the fair value measurement and             instead of entity-specific assumptions.       is to back test models and calibrate
  disclosures guidance under previous       • Adjustments for risk of using certain        the models’ assumptions to continually
  U.S. GAAP in SFAS 157 and the              valuation techniques or valuation inputs.     improve the valuation process with the
  codified guidance under current           • Adjustments for nonperformance               ultimate goal to arrive at an appropriate
  U.S. GAAP in ASC 820?                      risk and credit rating changes in             fair value.
                                             valuing liabilities.
No. The Codification does not change U.S.                                                  4. If there are multiple valuation
GAAP; it creates a new structure which      2. If a fund changes its valuation               techniques available, how does
takes accounting pronouncements and           methodology for a certain investment,          a fund determine the most
organizes them by accounting topics.          when is the adjustment to the fair             appropriate valuation technique
ASC 820, Fair Value Measurements and          value of the investment recorded?              under ASC 820?
Disclosures (formerly FASB Statement
No. 157 Fair Value Measurements) is now     Fair value measurements are considered         The valuation methods with the
                                            accounting estimates. Except in certain        most observable inputs should be




32 Rothstein Kass
given priority over those that have       Accounting guidance effective for 2010       schedule of investments and should be
unobservable inputs. The overall          will require funds to disclose significant   included in the footnotes to the financial
theme of ASC 820 is to elevate the        transfers between Levels 1 and 2.            statements.
fair value measurement in its entirety    All transfers in and out of Level 3 are
within the three-level hierarchy as       required to be disclosed in the Level        Some funds are evaluating the required
high as possible and to use the most      3 rollforward. Significance of Level 1       disclosures of ASC 820 in conjunction
observable and reliable market inputs     and 2 transfers should be determined         with the required disclosures of the
in a fair value measurement. However,     based on a meaningful benchmark,             condensed schedule of investments.
funds should place less reliance on       such as a fund’s net assets. Funds may       There is consideration of including the
observable inputs which are indicative    elect a policy for determining the timing    level designations in the condensed
of disorderly transactions. If one        of recognizing the transfer, but they        schedule of investments. To date, we
valuation method proves to be a better    must apply the policy consistently.          have not seen this approach in practice.
representation of market participant
assumptions than other methods, that      6. What is the consequence when a            8. Are the fair value disclosure
valuation method should be used.            fund assigns incorrect levels to its         requirements in ASC 820 required
However, multiple valuation methods         investments according to the fair            for feeder funds whose sole
can be combined to value an investment.     value hierarchy?                             investment is in a master fund?
The weighting of each valuation
method will require judgment by the       Assigning levels according to the fair       Generally, the fair value disclosure
fund. Once the valuation methods are      value hierarchy under ASC 820 is an          requirements in ASC 820 are not required
chosen, the best practice is to use the   important part of a fund’s year-end          for feeder funds whose sole investment
methods chosen on a consistent and        financial reporting internal control         is in a master fund. Feeder fund footnote
contemporaneous basis. If a change in     system. If a fund’s internal controls        disclosures should include a reference to
methods or a change in the combination    are not adequate to assign the correct       the valuation and disclosures included in
of methods used will result in a better   levels to its investments, fair value        the attached report of the master fund.
fair value measurement, the change in     footnote disclosures may be materially
approach is allowable. Any change in      misstated. The resulting deficiency may      9. Should a fund record its debt
method is treated as a change in an       be deemed a significant deficiency or          facility at fair value and disclose
accounting estimate and the resulting     material weakness which would require          the debt per the requirements of
impact on fair value should be recorded   a comment in a SAS 115 letter.                 ASC 820?
to income in the accounting period of
the change. In addition, when material,   7. Are the fair value disclosure             Under US GAAP, a debt facility should
changes in valuation techniques will        requirements in ASC 820 reported           be presented at the amounts payable to
require disclosure in the footnotes to      on the condensed schedule of               the counterparty and not at fair value;
the financial statements.                   investments or in the footnotes            unless the fair value option is elected
                                            to the financial statements?               under ASC 825, Financial Instruments.
5. What are the recognition guidelines                                                 If a fund does not elect the fair value
  for transfers between levels in the     The fair value disclosure requirements in    option for the debt facility, the debt is
  fair value hierarchy?                   ASC 820 are not part of the condensed        not required to be disclosed under the




                                                                                                        Rothstein Kass 33
requirements of ASC 820. However, if            the net asset or liability balance with        11. What factors should funds
a fund does elect the fair value option,        the derivative counterparty. However,              consider when applying the
the liability to the counterparty will          funds should carefully review any master           fair value premise to liability
be measured at fair value using the             netting arrangements to determine                  instruments?
guidance in ASC 820 (i.e., maximize the         whether the arrangements permit the
use of observable inputs and minimize           netting to apply between different             When a quoted price in an active market
the use of unobservable inputs).                product types.                                 for the identical liability is available,
Considering that the debt facility may                                                         the quoted price should be used. If the
not be trading in the market place, there       Depending on the provisions of enforceable     quoted price in an active market for the
may be little or no observable market           master netting arrangements, the               identical liability is not available, a fund
data on the fair value of the debt facility.    nonperformance risk adjustments may be         shall measure fair value using one or
In this case, a fund will have to develop its   determined at the counterparty level or by     more of the following techniques:
own internal model, most likely using an        contract type. Since certain disclosures
expected present value technique                are derived from an instrument-by-             a. A valuation technique that uses:
to arrive at its estimate of fair value.        instrument level of detail, a reasonable        1. The quoted price of the identical
This would typically result in a Level          allocation methodology may be needed               liability when traded as an asset.
3 designation.                                  to push down any top-side valuation             2. Quoted prices for similar liabilities or
                                                adjustments for nonperformance risks at            similar liabilities when traded as assets.
10. How does nonperformance risk                the portfolio-level to the fund’s individual
    impact the fair value measurement           derivative positions. If the effect of the     b. Another valuation technique that is
    of derivatives?                             valuation adjustment is significant, it           consistent with the principles of
                                                may render the adjusted valuation as a            ASC 820.
Funds transacting in multiple over-             Level 3 measurement.
the-counter derivative positions may                                                           When measuring the fair value of a
need to incorporate portfolio-level             Exchange-traded derivatives, such              liability using the quoted price of the
adjustments to consider the effects             as futures contracts and certain               instrument when traded as an asset,
of certain risks on the valuation of            options, are generally subject to              funds should consider whether any
derivatives. The evaluation of a fund’s         market protections, such as daily              adjustments would be needed to reflect
credit risk exposures should include            margin postings and guarantees                 intrinsic differences when the instrument
the consideration of master netting             from the exchange clearinghouse                is traded as an asset versus when the
arrangements, collateral balances,              which mitigates the impact of                  instrument is traded as a liability.
contract settlement provisions, and the         nonperformance risk outside of                 When measuring the fair value of a liability
attributes of different derivative contract     that reflected in the quoted price.            using a valuation technique consistent
types. To the extent the master netting         Therefore, the fair value processes            with the principles of ASC 820, funds
arrangement for a fund’s over-the-              for exchange-traded derivatives                should consider whether market inputs
counter derivatives portfolio allows for        generally are not expected to involve          are derived from orderly transactions, as
offsetting between different contract           any significant nonperformance                 well as whether internal valuations may
types, the fund may be able to determine        risk adjustments.                              be more representative of fair value.
the overall credit risk exposure based on




34 Rothstein Kass
Funds should consider the impact of             14. If a fund receives broker-dealer            level of transparency behind the pricing
their nonperformance risk, including                quotes from multiple broker-                source, alternative valuation methods will
the existence of master netting                     dealers, can an average of the              be required to support the fair value of the
arrangements, when determining                      broker-dealer quotes be used                security.
the fair value of financial liabilities             to arrive at fair value?
transacted with counterparties.                                                                 16. When a fund receives multiple
                                                The first step in the evaluation of multiple        indicative broker-dealer quotes,
12. Are repurchase agreements and               broker-dealer quotes is to determine the            are the quotes considered to be
    reverse repurchase agreements               principal market in which the fund would            observable or unobservable?
    required to be disclosed in the             sell the asset or transfer the liability with
    fair value hierarchy level tabular          the greatest volume and level of activity. If   In order to evaluate whether broker-
    disclosure?                                 no principal market exists, then the most       dealer quotes are observable, a fund
                                                advantageous market should be used.             must evaluate the availability of those
Repurchase agreements are considered            If the brokers providing the quotes are         quotes to the marketplace as well as
investments stated at fair value and should     participants in the principal or the most       evaluate the consistency of the source.
be included in the fair value hierarchy level   advantageous market, ASC 820 allows for         Observable market inputs should not
tabular disclosure. Reverse repurchase          funds to use a mid-point within the bid-        be limited to information that is only
agreements typically represent a fixed          ask price quotes received by the brokers        available to the entity making the fair
and determinable obligation of a fund           as a practical expedient.                       value determination (or to a small
and should be presented at face value.                                                          group of users). Observable market
Therefore, reverse repurchase agreements        15. What level designation would                inputs should be readily available
are not included in the fair value hierarchy        a fund assign to an investment              and distributed to participants in
level tabular disclosure.                           where the fund can only get one             that market. In addition, observable
                                                    quote with a large bid-ask spread           market inputs should include a level
Third Party Pricing/Broker-                         from a broker-dealer that has               of transparency that is reliable and
Dealer Quotations                                   provided a legal disclaimer on              verifiable. Management will have to
                                                    the quote?                                  use their judgment to evaluate whether
13. Where does pricing from                                                                     inputs are “observable.”
    recognized third party pricing              If the quote itself is not a firm commitment
    services and broker-dealers fall            from the broker-dealer to transact at the       Transactional-based market inputs tend
    within the three-level hierarchy?           price quoted or if the broker-dealer is         to be more reliable. The range between
                                                not willing to provide transparency, the        bid-and-ask prices can be used to identify
Prices from recognized third party              input would generally result in a Level 3       whether the market is active or inactive.
pricing services or broker-dealers can          designation. Observable market inputs           A more active market will dictate more
fall within Levels 1, 2 or 3. A fund must       should be readily available and distributed     narrow ranges between bid-and-ask
gain an adequate level of transparency to       to participants in that market. In addition,    quotes with illiquid markets having
understand the inputs used by the pricing       observable market inputs should include         larger spreads.
services or broker-dealers that support         a level of transparency that is reliable and
the prices provided.                            verifiable. If a fund is unable to obtain a




                                                                                                                  Rothstein Kass 35
A best practice is to utilize a back testing   The principal market is the market in         should be used to arrive at fair value.
program to validate the indicative broker-     which a fund would sell the asset or          The most advantageous market is the
dealer quotes. To the extent there are an      transfer the liability with the greatest      market which would assign the highest
adequate number of transactions and            volume and level of activity. If a fund       fair value to an asset or the lowest fair
the variances between the broker-dealer        cannot identify a principal market, the       value in transferring a liability. If the
quotes and actual market transactions          most advantageous market should be            fund cannot gain access to the most
are reasonable, back testing may help          used to arrive at fair value. The most        advantageous market, it would not
verify the reliability of the market input.    advantageous market is the market             be permissible to use that market to
                                               that would assign the highest fair value      estimate fair value.
17. What would the level designation           to an asset or the lowest fair value in
    be for securities that rely on             transferring a liability. Transaction costs   If the fund in this case transacts on
    indicative broker-dealer quotes            should be taken into consideration in         both exchanges with neither being the
    with legal disclaimers?                    determining the most advantageous             principal market, the fund would again
                                               market. In making that determination,         use the most advantageous market.
An indicative broker-dealer quote is           a fund must calculate the net amount          If the fund only transacts on Exchange
typically provided by a broker-dealer          received from the sale of an asset or the     A, the fund would use the price from
or market maker to a trading party that        amount paid to transfer a liability. If a     Exchange A. If the fund does not have
is not firm and the broker-dealer is           fund cannot gain access to the principal      access to Exchange B, the fund would
not obligated to transact at the quote         or the most advantageous market, it           use the price from Exchange A.
provided. Therefore, a fund must evaluate      would not be permissible to use that
whether the quote is readily available         market to estimate fair value.                20. How can a fund determine, in
and distributed to the participants in                                                           quantitative terms, the definition
that market. In addition, a fund must          19. A fund purchases a security on                of an active market?
evaluate whether the quote is reliable             Exchange A. The security is
and verifiable. If a fund cannot obtain            traded on both Exchange A and             An active market is defined as a market
transparency to understand these                   B. Exchange B has more liquidity          in which transactions for the asset or
issues as well as the inputs used to               and is more active than Exchange          liability occur with sufficient frequency
arrive at the quote, the quote would not           A. Does the fund determine the            and volume to provide pricing information
be an observable input and the related             fair value of the security using          on an ongoing basis. Currently, there
security would generally result in a               Exchange A or B prices?                   has not been any quantitative guidance
Level 3 designation.                                                                         issued by the SEC, FASB or other industry
                                               When measuring fair value under               participant on the definition of an active
Fair Value Hierarchy-                          ASC 820, a reporting entity must              market. However, ASC 820 provides
Level 1 Considerations                         first determine the principal or most         factors to consider in determining whether
                                               advantageous market. The principal            there has been a significant decrease in
18. How does a fund determine the              market is the one where the fund has          the volume or level of market activity. The
    principal or most advantageous             regularly transacted in the security.         factors that a fund should evaluate include
    market?                                    If the fund cannot identify a principal       (but are not limited to) the following:
                                               market, the most advantageous market




36 Rothstein Kass
• There are few recent transactions.             21. For exchange-traded equities, can        able to absorb the entire block without
• Price quotations are not based on                  a fund use the consolidated tape         significantly impacting the market price
 current information.                                to price the securities?                 of the security. If a fund determines
• Price quotations vary substantially either                                                  that the position is not actively traded,
 over time or among market makers.               The “consolidated tape” is a high-speed,     a liquidity discount can be taken if, from
• Indexes that were correlated with the          electronic system that constantly reports    the perspective of the market participant,
 fair values of the asset are demonstrably       the latest price and volume data on sales    the fair value exit price would include this
 uncorrelated with indications of fair           of exchange-listed stocks. The data          discount. It is important to note that U.S.
 value for that asset.                           reflected on the consolidated tape derives   GAAP currently does not contain explicit
• There is a significant increase in implied     from various market centers, including       guidance on the use of a blockage
 liquidity risk premiums, yields, or             all securities exchanges, electronic         discount for fair value measurements
 performance indicators for observed             communications networks and third-           categorized within Level 2 or Level 3 of
 transactions or quoted prices when              market broker-dealers. Under ASC 820, a      the fair value hierarchy. However, as part
 compared with the fund’s estimate               fund would not use the consolidated tape     of their convergence project, the FASB
 of expected cash flows.                         but choose the price from the exchange       and the IASB are proposing to extend
• Wide bid-ask spread or significant             that is either the principal market or if    the prohibition of a blockage discount
 increases in the bid-ask spread.                no principal market exists, the most         to all fair value measurements of
• Significant decline or absence of a            advantageous market.                         financial instruments.
 market for new issuances (that is, a
 primary market).                                (Editor’s note: If a fund continues to       23. Is a fund required to disaggregate
• Little information is released publicly (for   use the “consolidated tape” for pricing,         Level 1 investments in the footnotes
 example, a principal-to-principal market).      it should set up an internal accounting          to the financial statements by industry
                                                 system to document that any differences          or geographic concentrations if Level
In determining an “inactive” market for          against the principal market or most             1 investments are already disclosed
thinly traded securities, we recommend           advantageous market are immaterial               on the SOI?
that a fund download the trading volumes         throughout the fiscal year.)
for those securities along with their                                                         To the extent the required Level 1
price feeds on a periodic basis. We              22. Block Discounts — Can a fund             investments disaggregation information
also recommend that a fund develop                   take a “haircut” off the price of a      is included elsewhere in the financial
a system that would highlight when a                 position in a small cap company?         statements (i.e., the condensed schedule
security’s average trading volume does                                                        of investments), there would not be a
not meet a certain quantitative threshold        It depends. The first step is to determine   need to repeat the Level 1 investment
(to be determined by management).                whether the security is actively traded.     disaggregation information in the fair
This reporting system should generate            ASC 820 prohibits the use of block           value hierarchy level tabular disclosure.
an exception report for management               discounts for securities traded in an        In such cases, we recommend adding
to evaluate whether securities with low          active market (Level 1). Under previous      a reference to the fair value hierarchy
trading volume should be designated              authoritative U.S. GAAP, a block discount    disclosure indicating that the required
as Level 1 or 2 securities.                      was applied to the price of a large          disaggregation of Level 1 investments
                                                 position when the market would not be        are disclosed in the SOI.




                                                                                                                 Rothstein Kass 37
Fair Value Hierarchy—Level 2                   The application of a standard discount       valued using a widely accepted and
and Level 3 Considerations                     rate to investments such as restricted       non-proprietary model where the
                                               stock or a PIPE would not comply             inputs, such as implied volatility,
24. Should a discount be taken when            with ASC 820. A fund would need to           are observable, the options would
    determining the fair value of a            consider the quality of the investment       also typically be assigned a Level 2
    restricted stock?                          as well as the changing circumstances        designation. Options that are priced
                                               surrounding its restrictions. Careful        via a model using historical volatility,
A fund must assess the reason for the          analysis of all relevant drivers of the      other unobservable inputs, or include
restriction and whether the restriction        discount, including but not limited to the   significant judgments and adjustments
would be a consideration by market             length of restriction, float and market      to arrive at fair value, would typically be
participants when determining its fair         capitalization of the issuer, liquidity of   assigned a Level 3 designation.
value. If the starting point of valuation      the market place and other qualitative
is the exchange-traded price of an             and quantitative factors specific to         28. What is the level designation in
unrestricted stock, typically a discount       the security should be evaluated in              the fair value hierarchy for PIPEs
would be taken to arrive at fair value         determining the appropriate discount rate.       including the warrants typically
since a market participant would assess                                                         attached to those transactions?
a higher risk for the restricted position      26. Are total return swaps where the
and thus demand a higher than expected             underlying notional position is an       For a PIPE investment where the fair
internal rate of return. However, when             actively traded security (i.e., Level    value is primarily based on the price of
a member of fund management is on                  1 security) considered Level 1 or        the actively traded public equity similar
the board of directors of a holding and            Level 2?                                 to the unit of account, the PIPE would
therefore the fund has certain restrictions                                                 typically be Level 2. If a liquidity discount
on sales of the related security, a discount   The unit of measure is the total return      from the underlying public equity price
would not be taken since the restriction       swap contract and not the underlying         is significant, the securities may fall
would not be transferred to a buyer of         stock. A total return swap contract          into Level 3. In addition, for convertible
the security. If the restriction is on the     where the underlying notional position       securities that are not “in the money,”
security and such restriction would            is actively traded would likely fall into    where the fair value is based upon the
transfer to the holder (e.g., Rule 144         Level 2, provided that the inputs used to    underlying borrower’s credit worthiness
stock), a discount should be taken.            determine the valuation are observable.      and other unobservable inputs, they will
                                                                                            fall into Level 3.
25. Is it appropriate for a fund to            27. Where do options fall within the
    adopt a policy of applying a                   fair value hierarchy?                    Typically, warrants in PIPE transactions
    standard discount rate to its                                                           will fall into Level 3 since the input of
    investments (i.e., restricted stock        Options that are traded on an exchange       historical volatility into a model is not
    or private investments in public           in an active market would be assigned        an observable input. Warrants can
    equity (PIPEs)) when measuring             a Level 1 designation. Options that are      occasionally fall into Level 2 if they
    fair value?                                traded on an exchange in an inactive         are in the money and the underlying
                                               market would typically be assigned           public security is actively traded or
                                               a Level 2 designation. For options           an observable implied volatility can




38 Rothstein Kass
be obtained from market data. The              in the inputs to the valuation technique.      should consider the use of valuation
challenge is to determine the lowest           A hold-to-maturity mentality does not          adjustments that reflect more current
level input that is significant to the fair    conform to ASC 820 since it reflects an        assumptions about market conditions.
value measurement. For in-the-money            entity-specific assumption. ASC 820
warrants, the volatility may not be a          requires the fair value measurement to         31. What level designation should
significant input to its fair value and thus   reflect an exit price in current market            a fund assign to a deferred fee
result in a Level 2 designation. It will be    conditions, including the relative liquidity       liability which is reinvested into
up to the judgment of management to            of the market.                                     the fund?
evaluate the significance of the inputs.
                                               30. If there are no recent transactions        A deferred fee liability has the
29. In an illiquid market (such as                 for an asset-backed security and a         characteristics of a host debt
    the asset-backed security market)              fund uses matrix pricing comparing         instrument with an embedded total
    there can be a disconnect                      asset-backed securities that have          return derivative feature which is
    between the intrinsic value (e.g.,             similar attributes and vintages, or a      indexed either to the fund’s rate of
    the value determined by applying               fund uses the ABX credit-derivative        return, participation in specific assets
    data inputs to a valuation which               index to price the security, what          of the funds, or a combination of
    may presume the position would                 would be the resulting level               both. Since the unit of account of the
    be held to maturity) and what                  designation for these approaches?          deferred fee liability is different from
    the current quoted observable                                                             the underlying investments of the fund,
    prices are for the security in the         Using matrix pricing of similar asset-         the deferred fee liability may not be
    marketplace. Can the intrinsic             backed securities that have recent             designated as Level 1, even if all of the
    value be used in lieu of the quoted        observable transactions or using the           underlying assets and liabilities are
    prices when the current market             ABX credit derivative index as a starting      actively marked on a daily basis. Funds
    is not active and therefore has            point are Level 2 inputs. Adjustments          may also consider analogized guidance
    unusually large bid-ask spreads?           to Level 2 inputs will vary depending          of investments in private investment
                                               on the factors specific to the security        companies measured at fair value using
The use of unobservable inputs is              (e.g., comparability, vintage, volume).        the practical expedient based on the
appropriate only to the extent that            However, any adjustment to the Level 2         ability to redeem at or within a near term
observable inputs are not available.           inputs that is significant to the fair value   of the reporting date when determining
ASC 820 states that entity-level inputs        measurement will drop the designation          between Level 2 and Level 3 designation.
(i.e., unobservable) can be used as long       to Level 3. Funds should obtain
as there is not contrary data indicating       an understanding of the processes
that market participants would use             involved in constructing the ABX credit
different assumptions. If such contrary        derivative index or other forms of
data exists, a fund must adjust its            matrix pricing to determine if the matrix
assumptions to incorporate that market         pricing is responsive to changes in
information. A fund must also consider         market conditions in a timely manner.
the risk inherent in the valuation             If the outputs of the matrix pricing are
technique used and the risk inherent           indicative of stale transaction data, funds




                                                                                                                Rothstein Kass 39
32. When is it appropriate to designate         automatically be deemed near term.             sale from the investee or a buyer’s due
    a fund of funds investment in a             Other facts and circumstances, such            diligence procedures).
    private investment company as               as the likelihood or actual imposition        • Actions required to complete the plan
    a Level 2 investment in the fair            of gates, and the liquidity of the             indicate that it is unlikely that significant
    value hierarchy?                            investee fund’s portfolio, should also         changes to the plan will be made or that
                                                be considered by the reporting fund in         the plan will be withdrawn.
The unit of account for an investment in a      determining the appropriate level within
fund of funds is the ownership interest in      the hierarchy. In situations when there are   If it is probable at the measurement
the underlying investee fund itself (in other   material adjustments to NAV to arrive at      date that a reporting fund will sell an
words, the investment being evaluated           fair value the result will typically be a     investment, or a portion of an investment,
is the limited partnership interest or the      Level 3 designation.                          at an amount different from NAV, the
offshore shares issued by the underlying                                                      portion that the reporting fund intends to
investee fund, not the underlying               33. How does the probable sale of an          sell should be valued according to other
investee funds investments). When                   investment for an amount other            provisions of ASC 820. Other provisions of
determining whether the investment                  than NAV affect the investments fair      ASC 820 can include a market or income
will be categorized as Level 2 or Level             value measurement and the use of          based valuation approach. The remaining
3 within the fair value hierarchy, the              NAV as a practical expedient?             portion of the investment that is not
reporting fund must consider the length                                                       probable of being sold may be valued
of time remaining until the investment          ASC 820 states that the use of NAV as a       by using NAV as a practical expedient.
becomes redeemable. As long as the              practical expedient cannot be used when
reporting fund has the contractual and          it is probable that a reporting entity will   However, if a fund enters into a plan
practical ability to redeem its investment      sell an investment at an amount other         to sell a group of investments, but the
in a fund of funds at the NAV in the near       than NAV. A sale is considered probable       individual investments to be sold have
term at the measurement date, then the          only if all of the following criteria have    not yet been identified, the individual
investment may be classified as Level           been met as of the reporting entity’s         investments will continue to qualify for
2, even if a redemption notice was not          measurement date:                             the practical expedient.
submitted. “Near term” is a matter of
professional judgment, and historically         • Management, having the authority to         34. What fair value hierarchy level
has been defined by the FASB as a                approve the action, commits to a plan to         designation would a fund assign
period of time not to exceed one year            sell the investment.                             to an investment in a private
from the measurement date. However,             • An active program to locate a buyer             investment company when the
a redemption period of 90 days or less           and other actions required to complete           private investment company has
would likely be considered near term since       the plan to sell the investment have             a portion of its investment held
any potential discount relative to the time      been initiated.                                  in a side-pocket?
value of money to the next redemption           • The investment is available for
date would not likely be considered              immediate sale subject only to terms         The fair value hierarchy level designation
a significant unobservable input. It is          that are usual and customary for sales       for an investment in a private investment
important to note that a redemption              of such investments (for example, a          company may be bifurcated between
period of 90 days or less should not             requirement to obtain approval of the        the general class or liquid portion of the




40 Rothstein Kass
investment and side-pocket portion of        • The investee fund’s fair value estimation   36. What should a fund consider as
the investment. The side-pocket portion       processes and control environment,               part of the requirement to disclose
of the investment would generally be          and any changes to those processes               information about the inputs and
classified in Level 3 and the general         or the control environment.                      valuation techniques for Level 2
class or liquid class may qualify for        • The investee fund’s policies and                and 3 measurements?
Level 2 classification.                       procedures for estimating fair value
                                              of underlying investments, and any           Funds should consider the significance
35. How does a fund conclude that             changes to those policies or procedures.     and risk factors associated with an
    NAV, as most recently reported           • The use of independent third party          investment class in determining an
    by the investee fund manager,             valuation experts to augment and             appropriate level of detail for the
    has been calculated according             validate the investee fund’s procedures      disclosure of the valuation inputs and
    to the measurement principles             for estimating fair value.                   techniques used, with an emphasis
    of ASC 946?                              • The professional reputation and standing    towards investments with a higher degree
                                              of the investee fund’s auditor.              of subjectivity in the valuation process (i.e.,
A fund is responsible for the valuation      • Qualifications, if any, of the auditor’s    Level 3 investments). When determining
assertions in its financial statements.       report on the investee fund’s                the appropriate detail of valuation inputs,
Determining that reported NAV is              financial statements.                        funds should consider quantitative
calculated consistently with ASC             • Whether there is a history of significant   information about the inputs (e.g.,
946, including measurement of all             adjustments to the NAV reported by the       prepayment rates, default rates, interest
or substantially all of the underlying        investee fund manager as a result of         rates, discount rates, and volatilities),
investments of the investee in                the annual financial statement audit         the nature and detailed characteristics of
accordance with ASC 820, requires a           or otherwise.                                the item being measured, and how third-
fund to independently evaluate the fair      • Findings in the investee fund’s advisor     party information such as broker quotes,
value measurement process utilized by         or administrator’s SAS 70 report, if any.    pricing services, net asset values and
the investee fund manager to calculate       • Whether NAV has been appropriately          relevant market data was considered in
the NAV. Such an evaluation is a matter       adjusted for items such as carried           measuring fair value.
of professional judgment and includes         interest and clawbacks.
determining that the investee fund           • Comparison of historical realizations       In many instances, a qualitative
manager has an effective process and          to last reported fair value.                 description of valuation inputs may
related internal controls in place to                                                      be sufficient to describe the valuation
estimate the fair value of its investments   If the NAV reported by an investee fund is    inputs used. However, funds should
that are included in the calculation of      not deemed to be calculated consistently      also consider disclosures of quantitative
NAV. In making this determination, a         with ASC 946, the reporting fund may          information on valuation inputs based
fund might consider the following key        need to determine an adjustment to            on assumed market participant
factors relating to the valuation received   reported NAV in order to use the practical    parameters (e.g., discount rates, market
from the investee fund manager:              expedient to measure the fair value of a      comparable multiples, market yields,
                                             private investment company.                   default rates, etc.) when the magnitude
                                                                                           of subjectivity intrinsic to the investment
                                                                                           valuations warrant a greater degree of




                                                                                                              Rothstein Kass 41
transparency in the disclosures. We do        company, a fund should consider (1) the       39. For a private loan receivable,
not believe that specific quantitative        timing and pricing of a recent round of           does ASC 820 require an
amounts based on unobservable data            financing, and (2) whether any material           adjustment to the fair value
such as revenue streams and cash              events occurred subsequent to the                 based on movements of interest
flow projections provide meaningful           transaction that would impact the fair            rates for similar loans in the
information, especially when aggregated       value measurement on the measurement              marketplace (even though the
at the investment class level. In addition,   date. Since capital structures of a private       underlying credit of the borrower
we do not believe that inputs that are        company can be complex, a full analysis           has not deteriorated)?
specific to an individual investment to       of the contractual terms of a recent round
a class which does not correlate to the       of financing must be part of the fair value   Yes. If the private loan receivable is
class as a whole, such as a quoted price      measurement process. Generally, private       a fixed rate or floating rate loan and
for a stock or debt instrument or a recent    equity investments will be classified as      interest rates for similar loans have
round of financing, provide meaningful        Level 3. ASC 820 encourages multiple          moved, a market participant would
quantitative detail to the investment class   valuation techniques when dealing             factor in that movement into the fair
as a whole. However, these inputs would       with Level 3 investments. When using          value of the private loan. This poses
be relevant from a qualitative basis and      multiple valuation techniques, a fund’s       challenges to funds that originate loans
should be disclosed in the discussion of      management may place greater weight           when their existing valuation policy
valuation inputs used.                        on the most recent round of financing         is to generally carry loans at par unless
                                              over valuation methods such as                there is a default or impairment (which
When multiple valuation techniques are        discounted cash flow projections, or a        would require a write down). ASC 820
used within an investment class, we           multiple of revenues or EBITDA derived        requires that these funds look to the
recommend as a best practice for funds        from market comparables.                      market to see what the current yields are
to disclose the aggregate fair values by                                                    for similar loans and adjust the carrying
the valuation methodology utilized.           38. Should transaction costs                  value of the loans to reflect market
                                                  associated with the acquisition           participant assumptions. Funds should
Fair Value Hierarchy—Level 3                      of an investment be capitalized           also consider collateral values as part of
Considerations-Investments in                     into the cost of the investment           the assumptions of expected recoveries
Private Operating Companies                       or expensed as incurred?                  for loans that are nonperforming.


37. For an investment in private              Under ASC 946 a reporting entity should       40. Can a fund rely on other disclosures
    operating companies, how does             capitalize transaction costs into the             within the financial statements in
    a recent round of financing               initial cost basis of the investment.             lieu of applying the disaggregation
    factor into the fair value inputs in      A reporting entity would then measure             requirements to the disclosure of
    arriving at fair value, as well as        the investment at fair value which may            the Level 3 rollforward?
    the level designation within the          result in an immediate unrealized loss
    fair value hierarchy?                     on the investment.                            Generally the other disclosures within
                                                                                            the financial statements do not provide
When determining fair value for its                                                         sufficient disaggregated detail of
investment in a private operating                                                           the activity of a fund’s investments




42 Rothstein Kass
by discrete classes of assets and           We recommend that funds consider the         to adopt new valuation procedures
liabilities. The disaggregation of          significance of activity within meaningful   to track the availability of alternate
fair value disclosures requires that        classes during the reporting period as       unobservable inputs on a recurring
significant judgment and consideration      a primary metric in determining the          basis. This may result in substantial
should be given to the nature and           appropriate level of detail which should     costs to retain the use of specialists
risks relevant to the asset and liability   be provided for the disclosure of the        or to develop the in-house expertise
classes measured at fair value on           Level 3 rollforward.                         to identify the unobservable inputs
a recurring basis. We believe that                                                       appropriate for the circumstances. Funds
consideration of the Level 3 activity       41. What is the expected impact of the       may be subject to additional scrutiny
components, such as significant                 proposed disclosure requirement          about the potential impact on their
investment purchases or significant             of a measurement uncertainty             NAVs resulting from the presentation
valuation write-downs, provides a               analysis for Level 3 investments?        of alternative unobservable inputs.
more meaningful basis for granular                                                       As an additional risk management
disclosure for a class of shared            The proposed guidance from the FASB          practice, funds may need to implement
economic exposures (e.g., industry,         and IASB joint project to converge fair      documentation processes to justify
geographic, vintage, etc.) than             value measurement and disclosure             their use of a given input over other
an evaluation solely based on the           requirements may require funds to            available alternatives as part of the
significance of investment balances         disclose a measurement uncertainty           valuation process. Furthermore,
as of the reporting date.                   analysis for its Level 3 investments.        funds may need to determine their
                                            The analysis would reflect the effects       own benchmark of “significance” in
For example, a fund may hold a              on a Level 3 fair value measurement of       disclosures of the pro forma effects
substantial amount of private equity        the changes in one or more inputs to         on the fair value measurements.
investments that had little or no           different amounts that could have been
transaction activity during the reporting   reasonably used in the circumstances         There may be difficulties in performing a
period, and is marked substantially         and that would result in a significantly     measurement uncertainty analysis when
at the same value as from the prior         higher or lower fair value measurement.      the information needed to prepare the
period. A disaggregated level of detail                                                  disclosure is not available. The availability
may be of limited use to the financial      The responses received during the            of inputs may be limited to indicative
statement users. However, a fund            comment period for this proposed             pricing from single broker quotes where
may hold investments in a distressed        guidance reflect a consensus of              a fund is unable to obtain transparency
industry within its private equity          expecting significant costs and              in the valuation techniques and inputs
portfolio which has been written down       additional burden to implement the           used by the broker. Funds may also use
to zero. A more granular detail of the      measurement uncertainty analysis             external pricing services which utilize
classes subject to significant activity     disclosure. Funds with significant           proprietary valuation models but do not
in the Level 3 rollforward may provide      positions in Level 3 investments are         provide access to the components of
meaningful information to the users of      likely to incur significant costs in         the model.
the financial statements.                   performing additional calculations
                                            and to aggregate the effects into            The proposed guidance may be required
                                            meaningful classes. Funds may need           for a fund’s Level 3 investments unless




                                                                                                           Rothstein Kass 43
other accounting guidance precludes
this requirement. A separate joint project
between the FASB and IASB on Financial
Instruments intends to exclude the
measurement uncertainty analysis for
“unquoted equity instruments.” Several
comments from constituents point
out the uncertainty of which types of
instruments (e.g., investments in private
investment companies valued using
NAV under the practical expedient) are
included with the definition of “unquoted
equity instruments.” Furthermore, the
inclusion of the scope exception for
“unquoted equity instruments” within the
Financial Instruments joint project may
result in uncertainty in the application of
the scope exception if the effective period
is a later period than the initial adoption of
the measurement uncertainty analysis.


A final standard is expected to be issued
during the first quarter of 2011. As of press
time, there are many uncertainties relating
to the implementation of the measurement
uncertainty analysis of which the final
resolution of various constituent concerns
is not yet determinable. Rothstein Kass
continues to monitor the progress of this
topic and will provide additional guidance
when the final standard is issued.




44 Rothstein Kass
About the Authors

               Ralph Natilli, CPA, is a principal based in the Firm’s Roseland, New Jersey office and specializes in
               providing financial reporting, tax and accounting services to clients in the financial services industry.
               He has experience working with a variety of clients including domestic and offshore investment
               partnerships, funds of funds, investment advisors and related management entities. He is a certified
               public accountant in New York, New Jersey and Massachusetts.




               John Barbagallo, CPA, is a senior manager in the quality control group and is responsible for the
               Firm’s accounting research and development. In that role, John monitors and analyzes current projects,
               activities and decisions of FASB and IASB and provides comprehensive summaries, interpretations
               and presentations to clients and members of the Firm. John is a certified public accountant in New York
               and New Jersey.




               Richard Sumida, CPA, is a senior director based in Rothstein Kass’ Roseland, New Jersey office.
               As a member of Rothstein Kass’ quality control department, Rich is extensively involved in the research
               and consultation of complex accounting and auditing issues relevant to the Firm’s client practices,
               particularly within the alternative investment and broker-dealer industries. Rich is a certified public
               accountant in New York and New Jersey.




                                                                                                   Rothstein Kass 45
About the Editors

Howard Altman, CPA, is Co-CEO and Co-Managing Principal and the Principal-in-Charge of the Financial Services Group at
Rothstein Kass. He has more than 30 years experience in the financial services arena, with particular emphasis on investment
partnerships, offshore funds, private equity funds, funds of funds, registered investment advisers and broker-dealers. A specialist
in issues related to hedge fund structures, operations and tax matters, he is recognized nationally for his knowledge of the hedge
fund industry, the issues affecting it and prospective trends.


Chris Mears, CPA, is the Principal-in-Charge of Rothstein Kass’ New York Metro Financial Services Group. He has over 17 years
of experience in financial services, with a particular emphasis on investment partnerships, offshore funds, and private equity funds.
Chris advises alternative investment clients at the initial organizational phase to address the accounting and tax matters that may
have an impact on the fund. After fund formation, he typically oversees all services provided to the fund by the Firm, including the
audit and ongoing consultation regarding many diverse operational, transactional and tax matters.



About the Contributors

Vincent Calcagno, CPA, is the Principal-in-Charge of Rothstein Kass’ Southern California offices, located in Beverly Hills and
Orange County. Vincent specializes in audit, tax and consulting engagements for investment funds, registered investment
advisors and broker-dealers. He has extensive operational experience in the financial services industry.


Timothy Jinks, CPA, is responsible for Rothstein Kass’ compliance with accounting, auditing and professional standards for all
offices, and he oversees internal consultation on technical matters, quality control reviews of financial statements, client
acceptance, peer reviews, PCAOB compliance, internal inspections and monitoring.



About Rothstein Kass

Rothstein Kass is a premier professional services firm that has served privately held and publicly traded companies, as well as
high net worth individuals and families, for over 50 years. The firm provides audit, tax and advisory services to clients including
hedge funds, fund of funds, private equity, broker-dealers and registered investment advisors. The Rothstein Kass Financial
Services Group is consistently ranked as a top service provider to the alternative investment industry. We are experts in the
field, working with clients within the hedge fund industry to anticipate opportunities on the horizon as well as help them to
respond to short-term competitive challenges.


Beyond audit and tax services, Rothstein Kass provides a full array of integrated services, including strategic business counseling,
regulatory compliance and SEC advisory services, insurance and risk management consulting and family office services.
Rothstein Kass has offices in California, Colorado, New Jersey, New York, Texas and the Cayman Islands.




46 Rothstein Kass
Rothstein Kass 47
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New York, NY 10019
Telephone: 212.997.0500


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New York
Orange County
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Walnut Creek
www.rkco.com


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