Fair Value Measurement, 3rd Edition

CHAPTER 11Fair Value Measurement for Alternative Investments

INTRODUCTION

Fair value measurement for alternative investments is a topic that received attention from the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA) shortly after the issuance of the fair value measurement accounting standards now codified as FASB Accounting Standards Codification 820, Fair Value Measurement (ASC 820). Alternative investments are unregistered investment funds that are classified as investment companies for financial reporting purposes by the FASB. According to the FASB Master Glossary:

An investment company is a separate legal entity whose business purpose and activity comprise all of the following:

• Investing in multiple substantive investments
• Investing for current income, capital appreciation, or both
• Investing with investment plans that include exit strategies

The FASB further clarifies that an investment company does not acquire or hold investments for operating purposes. Investment companies share similar attributes such as investment activity as the primary business activity, unit ownership, and the pooling of owners' funds for management by investment professionals.¹ Accounting standards for investment companies codified in ASC 946, Financial Services—Investment Companies, require that investments exceeding one percent of assets be reported at fair value.

Investment companies generally fall into two categories: those ...