Dr. Ma is a managing director in Houlihan Lokey's New York offi ce, where her primary responsibilities as part of the fi rm's Financial Opinions & Advisory Services business include providing valuations, fi nancial opinions, and expert witness testimony. She leads the fi rm's Illiquid and Complex Securities Valuation practice and is a member of the fi rm's Technical Standards Committee.
Ethics Remediation Center Q&A How Companies Should Account for Kept Assets At the request of subscribers, Compli- for reasonable differences in estimation by place. Richie Fund’s auditors require the ance Week offers a Remediation Center, different holders. Third, the intent and the cash-rich fund to mark its asset at those in which readers can submit questions financial ability of an investor to hold an distressed prices, resulting in an under- anonymously to securities and accounting investment to maturity is currently taken stated NAV. Then new investors in Richie experts. Compliance Week’s editors will into consideration when testing for asset Fund (if any!) would be able to pay a lower review all questions and then submit them impairment, but not in the measurement price to invest in the fund. That also puts to specialists who can address the issues in of fair value under the current accounting existing investors at a disadvantage. detail. standards. Fair-value accounting standards are Note: Compliance Week’s Remediation On the surface, these three general ob- guided by the principle that a fair value Center is an information service only. An- servations seem to be reasonable. How- should not take into consideration the swers should not be construed to be legal ever, when they are applied to the hedge specific facts and circumstances sur- guidance. Consult with your auditors, in- fund and private equity world, they may rounding the holder of that asset. Because ternal counsel, and external counsel on crit- result in non-compliance with fair-value of this, high-redemption situations that ical compliance and governance matters. accounting or inequitable wealth transfers many hedge funds now face may cause a To read other Remediation Center among fund investors. conceptual mismatch between the fair- questions and answers, or submit your Consider an example. Two funds hold value standards and what is “fair” to fund own, please go to www.complianceweek. in common a particular illiquid fixed-in- investors. com and click on “Topics” and “Remedia- come security. One fund is subject to sig- In short: sometimes a fair value just tion Center” from the Compliance Week nificant impending redemption requests isn’t fair. ■ toolbar. (call it the Needy Fund), while the other has enough liquidity to demonstrate the QUESTION financial ability to hold the investment Dr. Ma is a managing director in Houlihan Lokey’s I’m a financial reporting executive at an to maturity (the Richie Fund). Current New York ofﬁce, where her primary responsibilities as investment company, a “fund of funds” accounting standards would suggest that part of the ﬁrm’s Financial Opinions & Advisory Ser- where we count many hedge funds both funds value the security at the same vices business include providing valuations, ﬁnancial among our investors. Suffice to say level, allowing for small differences in opinions, and expert witness testimony. She leads the those hedge funds had a rough 2008 and the measurement approach taken by both ﬁrm’s Illiquid and Complex Securities Valuation prac- have been redeeming their holdings too funds. tice and is a member of the ﬁrm’s Technical Standards quickly for my taste. We’re selling lots of Assume this particular asset has just Committee. assets at cut-rate prices to raise cash, but traded hands in the secondary market, Dr. Ma has over 20 yea
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