Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

CHAPTER ELEVEN

Fair Value Measurement for Alternative Investments

Fair value measurement is currently one of the hottest topics for both investors in and management of private equity funds and other alternative investments. The American Institute of Certified Public Accountants (AICPA) considers alternative investments to be “private investment funds that meet the definition of an investment company.” In addition to private equity, some other common types of alternative investments include hedge funds, venture capital funds, real estate funds, fund of funds, and other similar types of investments. One of the challenges facing management of investment funds considered to be alternative investments is the appropriate measurement of value so that it can be reported to the fund's investors. Most investment funds require that the financial statements be reported under U.S. Generally Accepted Accounting Principles (GAAP), which requires that the assets held by the fund be measured at their respective fair values. Investment funds typically raise funds from sophisticated investors, as defined by the Securities and Exchange Commission (SEC), and in turn invest these funds in various types of investments. There are two salient issues in financial reporting related to the fair value measurements of alternative investments. The first issue is the fair value measurement of the fund's investments. These investments are recorded on the fund's financial statements as assets. The second issue ...