Private Equity Valuation Before and After ASC 820

52 Pages Posted: 17 Jan 2019 Last revised: 14 Aug 2020

See all articles by Peter D. Easton

Peter D. Easton

University of Notre Dame - Department of Accountancy

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Jennifer Sustersic Stevens

Ohio University

Date Written: June 8, 2020

Abstract

With $3.4 trillion invested in North America, private equity comprises a large segment of the capital markets. We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by US private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new standard clarified the most critical accounting policy for private equity funds, which typically include highly illiquid investments. Exploiting a setting where we can observe all cash flows over a fund’s lifetime, we show that the reported net asset valuations (NAVs) of liquidated private equity funds more accurately predict future net distributions to investors following ASC 820 adoption, particularly for smaller funds, less experienced fund managers, and high-performing funds. Our findings shed light on financial reporting in an opaque industry and suggest that ASC 820’s enhanced fair value guidance improved the information environment in an economically significant cross-section of the financial markets.

Keywords: private equity, NAV, NPV, fair value accounting, ASC 820, SFAS 157

JEL Classification: G1, G10, G30, M4, M41

Suggested Citation

Easton, Peter D. and Larocque, Stephannie A. and Sustersic Stevens, Jennifer, Private Equity Valuation Before and After ASC 820 (June 8, 2020). Available at SSRN: https://ssrn.com/abstract=3314992 or http://dx.doi.org/10.2139/ssrn.3314992

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

Stephannie A. Larocque (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jennifer Sustersic Stevens

Ohio University ( email )

College of Business Administration
526 Copeland Hall
Athens, OH 45701
United States

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