Fund-of-Funds May Use NAVs for Valuation if Underlying Funds Comply with AICPA Rules
AICPA released a technical practice aid outlining when a fund-of-funds may rely on the NAV provided by an underlying fund for fair valuation purposes. AICPA’s position is that the reporting fund may rely on the NAV of an underlying fund that calculates its NAV pursuant to ASC 946. To determine whether the underlying fund’s NAV process complies with ASC 946, the reporting fund should consider the underlying fund’s (i) fair value estimation processes and control environment, (ii) policies and procedures, (iii) use of independent third party valuation experts, (iv) portion of securities that are traded on active markets, (v) auditor reputation, (v) audit report qualifications, (vi) history of NAV adjustments, (vii) SAS 70 reports, (viii) NAV adjustments for carried interest and clawbacks, and (ix) comparison of historical realization to last reported fair value. For a fund investing in a fund-of-funds, the practice aid does not require a look-through to the NAV practices of the underlying funds.
OUR TAKE: We think this is a bit of a help to fund-of-funds managers as compared with the initial release of 2009-12, which significantly questioned the use of provided NAVs. This technical practice aid allows the use of the NAV so long as you verify the integrity of the process.