With the growth of alternative investments like private equity, venture capital, and hedge funds, reporting standards for these assets have become more important. The 2022 illustrative financial statements from the AICPA provide valuable insight into current best practices for reporting alternative investments. Some key aspects covered include disclosures around fair value measurements, investment risks, and fees paid to investment managers.
Fair Value Disclosures Critical for Alternatives
The illustrative statements emphasize the importance of robust fair value disclosures for alternative investments. Things like the valuation methodology, inputs used, and sensitivity to changes in inputs should be clearly laid out. This provides financial statement users with an understanding of how fair values were estimated for hard-to-value assets like private company stock.
Investment Risks Should Be Clearly Communicated
Given the complex risks involved with many alternatives, investment risks and uncertainties need to be conspicuously disclosed. Things like liquidity risk, leverage risk, concentration risk, and foreign currency risk. The illustrative statements give good examples of risk disclosures specific to the asset classes held.
Manager Fees and Terms Require Transparency
Fees and incentive compensation paid to investment managers need to be explicitly disclosed. The illustrative financials highlight clearly presenting fee terms like management fees, performance fees, hurdle rates, clawbacks, and ownership interests granted. This provides a complete picture of fees paid.
Disclosures Tailored to Investor Type
The sample statements also show providing disclosures tailored to different types of investors. Things like valuation policies may be detailed for institutional investors but summarized for individual investors. Illustrative reports for diversified investment companies, private equity funds, and pensions demonstrate this segmentation.
The 2022 illustrative financial statements for alternative investments emphasize fair value, risk, and fee transparency. Following these reporting best practices allows investors to gain a comprehensive understanding of alternative investment portfolio performance and risks.