How Companies Should Account for Kept Assets by ProQuest


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 Remediation Center

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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