This sounds kinda like communists did in the past: evaluating companies based solely by books and stupid laws and not the actual market (which wasn't in place anyway at that time). It's like planning precisely something you know you can't (because you don't know all the variables beforehand).
Another step to more beaureaucracy, like it's not enough what we already have...
Lindel
· 11 months ago
As a recovering accountant and current LP, I couldn't agree more.
Jeff Clavier
· 11 months ago
Yup, I am in the middle of that and it is a pain in the b@#$. Heads up to you, good folks of Foundry: when you do an inside round, therefore having existing investors define a new valuation for the company, auditors may tell you that it is not valid to use that new valuation as fmv (fair market value) because it was not independently established. And I had a similar dialogue trying to understand wtf should be done. Doh.
Jason
· 11 months ago
Yes, I'm "looking forward" to that discussion. Thanks for the heads up.
Jay Parkhill
· 11 months ago
I do kinda like @fredwilson's thought about all these valuations being generated using (supposedly) the same methodology across the board.
It would be cool to see an Angelsoft or someone similar anonomously aggregate the data so people can tap into it.
Over time it would show some fascinating trends- and then maybe someone could get FASB and the IRS to pay attention and tweak the rules to make valuations both uniform and meaningful.
</pipedream>
Facebook User
· 11 months ago
Have we reached the stage yet where the Section 409A valuation firms are asking to see the enterprise valuations done for FAS 157 purposes? Are we going to move to having a 409A valuation, a 123R valuation, and a 157 valuation?
Michael F. Martin
· 11 months ago
I'm starting to like these rants. :-)
I was flabbergasted when I first learned about FAS 157 back in 2007. I kept asking the accountants who were teaching me about it, "Why should my valuation be so closely tied to what's happening in the market right now when I might have bought a long time ago, and might not be selling for a long time in the future?" In fact, the mark-to-market rule is pro-cyclial, turning one good exit into a market-wide rally -- or one bad writeoff into a market crash.
But the accountants shouldn't be faulted too much for the rule. Accountants are not theorists, even if accounting rules require a good understanding of theory.
The fault lies with the financial services industry, which wanted rules that would promote more buying and selling. Buy and hold is good for everybody but the croupiers.
Logan
· 11 months ago
Gents, this is what regulation looks like. And as US accounting moves more towards international standards, you can expect much more of it.
It's not the accountants who are behind this, but the "global citizens" in the US.
Yuri Ammosov
· 11 months ago
Jason:
where one can review the complete methodology prescribed by this rule? It is published, or are you supposed to figure it out yourself?
jason
· 11 months ago
you are supposed to figure it out yourself. The auditors won't even tell you "here are the X things you need to do."
jd
· 11 months ago
So companies need to put a value on their assets? That's crazy! Is it really that hard to put a reasonable value on a company?
We had far less hubris about valuation before some people confused numbers that would be automatically suspect on the back of an envelope with true precision because "its in the computer." FASB signing off on this without really, really thinking about the potential behavioral, practical, economic, and political implications is much like the statement at the Baltimore CFA Society meeting in which it was suggested that "before we repeal anymore Depression ERA securities legislation, we should find out why they wrote it."
Now that we have opened this Pandora's box of "fair market value," the bigger question is how t0 undo the present state of fear that is crippling markets.
I think we would all be better served by getting off our collective high horses by only adjusting market values for assets regularly traded in transparent markets (listed stocks, Treasuries, rated corporate bonds, etc.) and do it where the valuation is merely an estimate unsupported by trading. Without a recent sale, we should not adjust book values absent hard evidence of impairment, e.g., the building burned to the ground. At the same time, we must work hard to disclose information about assets for which we do not change reported values so that other participants in the market can make their own reasoned conclusions about the prices they are willing to pay in an arms length exchange.
CoryS
· 11 months ago
Well said. The asset's intended holding period and the liquidity of the market are critical to understanding whether market pricing should be used.
Mr. ad guy
· 11 months ago
Jason, If your entire portfolio is filled with L3 asset descriptions then you are in for a VERY long year. The odd thing is that this ruling can work in favor of some companies. As an example, my company built a product where the last 3-4 sales of companies with similar products added up to over $14B. I guess fair market value for my company just shot through the roof. BTW - we are looking for another round and under FAS-157 I believe we have just become a hot ticket :)
arinewman
· 11 months ago
As a venture-backed startup, we aren't psyched on this either as it pushes more paperwork and reporting requirements on us, endlessly.
Manu Kumar
· 11 months ago
Couldn't agree more. I especially like your choice of words -- "stupid" is exactly what it is.
Jose Paul Martin
· 10 months ago
I couldn't but help forwarding this to my team! I initially thought the auditor was trying to learn when I started explaining the valuation, but I guess I was wrong - they're just stubborn a&@$**!
Jamie Lin
· 10 months ago
I don't know if only FAS157 is stupid or most ideas in GAAP are as stupid as a whole. I feel FAS157's mark to no-prevailed-price market doesn't sound much worse than, say, recognizing revenues before you get paid and then write part of it off later. What's wrong with cash-basis accounting? VCs are ultimately being judged by their cash-in cash-out returns just like equity analysts eventually have to back those stupid non-cash items out of the equation when they're evaluating companies. Am I being too obnoxious or most of these GAAP rules are just there to create jobs?
Robert
· 10 months ago
Amen, Jason.
I know many people who are functionally responsible for dealing with FAS 157 are too afraid to speak out about it. However, I have yet to meet a single CFO, GP or LP who thinks this is a good idea or solves a problem.
But seriously, you mean to tell me that your LPs are not ever going to ask you how well you are doing? How do the LPs decide which fund they should invest in if you are asking them to use a Ouija board to guess how well the current fund is doing?
What about when a capital call comes up dry -- no ideas on which companies are the keepers v. which get shutdown?
Come on you can do better than this.
TQ
· 7 months ago
Jason,
VCs are just a bunch a whiners!!!
If you do not know your investment value, you should not invest someone else's money!
An LP does want to know what his/hers investments are approximately worth.
If VCs would just stop complaining they could find inexpensive ways to satisfy their auditors as well as raise the confidence of their LPs.
I think that "trust me" does not work anymore. You either know what you are doing and prove it, or you don't.
TQ
ajax
· 4 months ago
Couldn't agree more. I especially like your choice of words -- "stupid" is exactly what it is.
petya124
· 3 months ago
I couldn't but help forwarding this to my team! I initially thought the auditor was trying to learn when I started explaining the valuation, but I guess I was wrong - they're just stubborn a&@$**!
luckyzhu
· 1 month ago
If you do not know your investment value, you should not invest someone else's money!
An LP does want to know what his/hers investments are approximately worth tiffany bracelet.
If VCs would just stop complaining they could find inexpensive ways to satisfy their auditors as well as raise the confidence of their LPs.
rustyj
· 1 week ago
Do any of you know anything about accounting? FAS 157 does not mandate any assets be recorded/reported at fair value. It simply better defines the methods that should be used, classifies the different types of valuation methods, (ie market avialable, 3rd party comparible, or estimate because no on has ever sold such a thing) and it is completely by CHOICE. Oh, yeah and it requires that companies that do use fair value to disclose the method, the inputs and the assumptions so investors can validate the data for themselves. Aren't you VC types supposed to be smart and know you cant believe everything you read on the internet?
All Comments
Another step to more beaureaucracy, like it's not enough what we already have...
Doh.
It would be cool to see an Angelsoft or someone similar anonomously aggregate the data so people can tap into it.
Over time it would show some fascinating trends- and then maybe someone could get FASB and the IRS to pay attention and tweak the rules to make valuations both uniform and meaningful.
</pipedream>
I was flabbergasted when I first learned about FAS 157 back in 2007. I kept asking the accountants who were teaching me about it, "Why should my valuation be so closely tied to what's happening in the market right now when I might have bought a long time ago, and might not be selling for a long time in the future?" In fact, the mark-to-market rule is pro-cyclial, turning one good exit into a market-wide rally -- or one bad writeoff into a market crash.
But the accountants shouldn't be faulted too much for the rule. Accountants are not theorists, even if accounting rules require a good understanding of theory.
The fault lies with the financial services industry, which wanted rules that would promote more buying and selling. Buy and hold is good for everybody but the croupiers.
It's not the accountants who are behind this, but the "global citizens" in the US.
where one can review the complete methodology prescribed by this rule? It is published, or are you supposed to figure it out yourself?
Now that we have opened this Pandora's box of "fair market value," the bigger question is how t0 undo the present state of fear that is crippling markets.
I think we would all be better served by getting off our collective high horses by only adjusting market values for assets regularly traded in transparent markets (listed stocks, Treasuries, rated corporate bonds, etc.) and do it where the valuation is merely an estimate unsupported by trading. Without a recent sale, we should not adjust book values absent hard evidence of impairment, e.g., the building burned to the ground. At the same time, we must work hard to disclose information about assets for which we do not change reported values so that other participants in the market can make their own reasoned conclusions about the prices they are willing to pay in an arms length exchange.
If your entire portfolio is filled with L3 asset descriptions then you are in for a VERY long year. The odd thing is that this ruling can work in favor of some companies. As an example, my company built a product where the last 3-4 sales of companies with similar products added up to over $14B. I guess fair market value for my company just shot through the roof.
BTW - we are looking for another round and under FAS-157 I believe we have just become a hot ticket :)
I know many people who are functionally responsible for dealing with FAS 157 are too afraid to speak out about it. However, I have yet to meet a single CFO, GP or LP who thinks this is a good idea or solves a problem.
But seriously, you mean to tell me that your LPs are not ever going to ask you how well you are doing? How do the LPs decide which fund they should invest in if you are asking them to use a Ouija board to guess how well the current fund is doing?
What about when a capital call comes up dry -- no ideas on which companies are the keepers v. which get shutdown?
Come on you can do better than this.
VCs are just a bunch a whiners!!!
If you do not know your investment value, you should not invest someone else's money!
An LP does want to know what his/hers investments are approximately worth.
If VCs would just stop complaining they could find inexpensive ways to satisfy their auditors as well as raise the confidence of their LPs.
I think that "trust me" does not work anymore. You either know what you are doing and prove it, or you don't.
TQ
An LP does want to know what his/hers investments are approximately worth tiffany bracelet.
If VCs would just stop complaining they could find inexpensive ways to satisfy their auditors as well as raise the confidence of their LPs.