International accounting and valuation standards – convergence

or divergence?

IFRS – the basics1967: In February 1967 the Accountants International Study Group (AISG) was formed to explore the formation of international accounting standards.

1973: In June 1973 the International Accounting Standards Committee (IASC) came into existence.

1997: The Standing Interpretations Committee (SIC) was established in 1997 to consider contentious accounting issues that needed authorative guidance to stop widespread variation in practice.

2001: The International Accounting Standards Board (IASB) is established to work on international financial reporting standards (IFRS).

2002: U.S. and international standard-setters issue the Norwalk Agreement to make their current rules compatible.

2002: The European Union (EU) announces its member states must use IFRS for their 2005 financial statements.2003: SEC issues concept paper on acceptability of international accounting standards.Sources: ICAEW, FASB and CFO Magazine

2005: SEC releases a road map for allowing IFRS filings without GAAP reconciliation for foreign firms by 2009 (or earlier).

2006: The IASB and FASB agree to work on all major projects jointly.

2007: SEC announces IFRS will be recognized in the U.S. within two years as part of an agreement with the EU.

2008: The SEC mapped out a proposed timeline for moving U.S. companies to IFRS.

2009: The IASB will end its moratorium for when companies need to adopt its new accounting standards.

2011: The earliest that accounting firms and U.S. multinationals estimate large U.S. companies could begin to use IFRS rather than GAAP. Canadian, Indian, and Japanese companies are slated to begin using the global standards.

2013: The earliest projection by accounting firms for mandating that U.S. companies convert their financials to IFRS, with 2015 being the first year smaller companies could follow suit.

Sources: ICAEW, FASB and CFO Magazine

IFRS – the basics

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Conversion or divergence?

IPEV clearly targets conversion:

• Goal is to have unified reporting standards for private equity

• Extension of the board to include U.S. practitioners as well as accountants that are close to FASB and other regulatory bodies

• Discussions with U.S. and EU regulators ongoing to drive conversion

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Conversion or divergence?

Push from private equity investors for unified valuation standards

• Better comparability of performance

• Simplification of reporting to their stakeholders

• Facilitation of more active secondary markets

• Simplication of audits for global PE investors

What are the critical differences between IFRS & US GAAP?

#1 Consolidations

How was the European adoption of IFRS received by the Private Equity Industry?

“There is a strong resistance against convergence with IFRS as far as the investment fund industry is concerned.” In regards to the consolidation issue in particular an individual noted “there are significant operational and cost ramifications arising from its application.”

“there is a strong resistance against convergence with IFRS as far as the investment fund industry is concerned” and in regards to the consolidation issue in particular noted “there are significant operational and cost ramifications arising from its application.”

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Consolidation (IAS 27)IPEV opposes consolidation aspect of assets in private equity fund reporting as in IAS 27

•Discussions with regulators in progress:

– EVCA has provided a detailed case study to the IASB as well as the EFRAG to show the negative effects of consolidation of portfolio companies in reporting

– EVCA, BVCA as well as ILPA are in discussions with IASB and have expressed concern

– EVCA in continued discussions with European Union to exempt PE funds from consolidation under IAS 27 and allow reporting under IAS 39 (reporting of individual company fair value)

– Discussions with IASB have not resulted in an exemption yet. End of March there will be another consultation appointment (exemption under US GAAP has been granted until language in AICPA SOP 60 is finalized)

What alternatives are there to IFRS adoption?

Peer review – what are GAAP are privately held UK Private Equity

houses following?

A UK subsidiary of US PE Fund – with over $1bn under management:

A private equity secondaries fund with approximately $8 billion under management:

A UK Venture fund:

“a leading global private equity and investment advisory firm”:

A “private equity fund manager based in London” with “resources of £1 billion”:

“a leading global private investment firm with over $7.5 billion of capital under management”:

“one of the first private equity fund-of-funds …investing in venture, buyout, and mezzanine and distressed markets in the U.S., Europe, Asia Pacific, and emerging markets” :

“a well established private equity firm operating in the UK mid-market for over 20 years”:

A European buyout fund that “manages funds with capital commitments totalling approximately €3.0 billion”:

A “venture capital firm working on behalf of institutional and private investors”:

“a leading Private Equity group, with offices in the UK and France and more than €2 billion of funds under management”:

A “leading private equity firm focused on the consumer sector” “led the investment of over €4 billion of equity”:

“a leading private equity investor in the European mid-market” :

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PE valuations decline with delay and in stages after a public market shock

Public equity

Stepchangedown

One to two months delay due to reporting cycle

Aggressive write down by some funds, over two quarters

End point historically higher

Start of down turn

Start ofrecovery

Private equity, (diversified portfolio)

Source: Capital Dynamics

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Historic pattern of PE NAV development

Appreciation/depreciation as percent of NAV

10.6%

17.9%

26.1% 26.9%30.9%

15.4%

-8.8%-8.5%-12.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008YTD*Years

Source: Capital Dynamics analysis based on the performance of 425 funds across strategies and geographies

* YDT, as of December 2, 2008 reflecting a mixture of June and September reports

Max. loss of 49% for S&P 500

?

2008 loss of 49% for S&P 500

Other ramifications of IFRS conversion

Questions?