Need To Meet: David L. Larsen, Duff & Phelps LLC

Technical changes in international accounting rules may lead to fluctuations in the way that sponsors put valuations on their portfolio companies, says David L. Larsen, a managing director at advisory firm Duff & Phelps LLC and a leader of the corporate finance consulting practice in its San Francisco office.

The International Accounting Standards Board adopted a set of rules in May that for the first time provides a precise definition of fair value and a single source of requirements for fair value measurement and disclosure. This, Larsen said, was one of the first major accomplishments since the IASB and the U.S. Financial Accounting Standards Board signed memorandum of understanding in 2006 to converge international accounting standards with U.S. GAAP.

In June or July, IFRS rules are coming on investment-company non-consolidated financial reporting. International standards today require financial sponsors to consolidate all their portfolio companies into a single balance sheet for their investors, but that’s almost certainly not going to become a requirement for U.S. firms, Larsen said. “It doesn’t make sense for a private equity fund to deliver a financial statement that looks like General Motors consolidating all the underlying subsidiaries or portfolio companies.”

Investment company accounting in the United States has been fairly solid for decades, Larsen said, but the process of negotiating the convergence of the rules has led the FASB to make certain tweaks in U.S. rules.

That said, the changes now afoot are unlikely to resolve discrepancies in the way that financial sponsors value the companies they invest in. In a semi-notorious incident from January, the New York Times received leaked documents showing how widely valuations might vary. For instance, Kohlberg Kravis Roberts & Co. was carrying the distressed Texas electric utility Energy Future Holdings Corp. on its books at 20 cents on the dollar, while consortium partner TPG Capital was carrying the asset at 40 cents.

“The accounting principles allow us each to exercise our judgment,” Larsen said. “We are each obligated for our own financial statements to estimate for our investors what would a market participant pay for that company.”

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