International Financial Reporting Standards and US GAAP require certain categories of assets and liabilities to be measured at fair value. Fair value measurements should reflect the price at which an orderly transaction to sell an asset or transfer a liability would occur.
This report looks at fair value measurements, defining level 1, level 2 and level 3 inputs, and reporting observations.
We examine whether reported fair values of individual investment assets held by listed private equity (LPE) funds reflect the economic fundamentals of the investees. We exploit the requirement for private companies in the UK to file financial statements. Under the assumption that company financial statements capture relevant information about economic fundamentals, we examine the extent to which the fair value measurements of individual investments recognised and disclosed by LPE funds reflect the fundamentals of investees.
Findings
Critics of fair value measurement suggest that its lack of reliability reduces the usefulness of reported asset values. Concerns are greatest for fair value measurements based on unobservable inputs. Read our conclusions in full.
