Topics include: "Fair Value Defined," "The Market Participant Perspective," "The Fair Value Hierarchy," "Markets That Are Not Active & Transactions That Are Not Orderly," "Practical Expedient for Investments in Funds That Report NAV," and "Disclosure Requirements"

1. 1
ASC 820
Fair Value
Measurement
An Overview of
for Firms Subject to the Investment Company Act of 1940

2. 2
Presentation
Outline
01. Fair Value Defined
02. The Market Participant Perspective
03. The Fair Value Hierarchy
04. Markets That Are Not Active & Transactions
That Are Not Orderly
05. Practical Expedient for Investments in Funds
That Report NAV
06. Disclosure Requirements

3. 3
01.
Fair Value Defined

4. 4
The FASB believes that, in order to be
useful, accounting information should be
both relevant and reliable
The
Fair Value
Objective
Reliability
Historical Cost
Relevance
Fair Value

5. 5
The
Fair Value
Definition
Fair value is the price that would be
received to sell an asset or paid to
transfer a liability in an orderly
transaction between market
participants at the measurement
date.

6. 6
The
Hypothetical
Fair Value
Transaction
Measurement Attribute
• Considers price received to exit an
existing position (sell asset or transfer
liability)
Motivation
• Not a forced transaction
Perspective
• That of the “market participant” that
holds the asset

7. 7
02.
The Market Participant
Perspective

8. 8
Market
Participants
Market Participants are buyers or sellers
in the principal or most advantageous
market who are:
• Independent of the reporting entity
• Knowledgeable about the asset and
the transaction
• Able to transact
• Willing to transact
Fair value of an asset shall be determined
based on the assumptions that market
participants would use in pricing the asset

9. 9
03.
The Fair Value Hierarchy

10. 10
The
Fair Value
Hierarchy
Observable Inputs
Based on market data obtained from
sources independent of the reporting entity
Unobservable Inputs
Reflect reporting entity’s own assumptions
about the assumptions market participants
would use

11. 11
Fair Value
Hierarchy:
Input Quality
Level 1
• Direct (unadjusted) quoted price from an
active market for identical assets
Level 2
• Quoted prices for similar assets
• Other observable inputs (interest rates,
yield curves, etc.)
Level 3
• Unobservable inputs not derived from the
market

12. 12
Common
Level 3
Inputs
• Cash flow forecasts for private companies
• Default probabilities and loss severities for
private placement debt or asset-backed
securities
• Growth expectations (revenue, earnings,
etc.)
• Required returns on illiquid investments
• Anticipated holding periods for illiquid
investments

13. 13
04.
Markets That Are Not Active
& Transactions That Are Not
Orderly

14. 14
Measuring Fair
Value When
Market Activity
Has Significantly
Decreased
Regardless of volume, objective is still to
determine FV at the measurement date under
current market conditions
• FV is a market-based measurement, not an entity-
specific measurement
• If volume has decreased significantly, judgment is
required when adjusting observed transaction prices
• Although potentially difficult to estimate, applicable
risk premiums to reflect uncertainty must be
considered
• The degree of difficulty in estimating a risk premium
is not a sufficient basis for not applying a risk
premium

15. 15
Factors Suggesting
Market Activity Has
Significantly
Decreased
• Few recent transactions
• Price quotes not developed using current
information
• Price quotes vary substantially
• Reduction of historical correlations
• Significant increase in implied liquidity
premiums, etc. compared to reporting entity’s
estimate of expected cash flows
• Widening bid-ask spreads
• Curtailment of primary market for similar
instruments
• Little information publicly available

16. 16
Measuring
Fair Value When
Market Activity
Has Significantly
Decreased:
Example
Illustrative FV yield determination (Example 8
from ASC 820)
• Build-up (discount rate adjustment) technique
indicates yield of 12%
• FV measurement also considered indicative
(nonbinding) quotes implying yields of 15% to 17%
• Concluded FV yield was 13%
Discount Rate Adjustment
Benchmark Risk-Free Rate
At the measurement date
3.00%
Original Credit Spread
Based on pricing at issuance
2.50%
Est. Spread on Widening Since Origination
Based on performance of relevant index
7.00%
Basis Adjustment for Index
Observed in most recent transaction
-3.50%
Liquidity Risk Premium
Measured Relative to Index Liquidity
3.00%
Indicated Yield 12.00%

17. 17
Transactions
That Are
Not Orderly
Indicators that a transaction was not orderly:
• Not adequate exposure to the market for
usual and customary marketing activities
• Seller marketed the asset or liability
to a single market participant
• Seller in or near bankruptcy, or under other
regulatory or legal requirements
to sell
• Transaction price an outlier compared to other
recent transactions for the same or similar
asset or liability

18. 18
Weighing Reported Transactions
Does the reporting entity have
sufficient information to
conclude whether observed
transaction is orderly?
Consider the transaction,
but give less weight than
otherwise
Was the transaction
orderly?
Place little, if any, weight
on the transaction
Give weight to transaction,
considering volume,
comparability, and timing
Yes
No
No
Yes

19. 19
05.
Practical Expedient for
Investments in Funds That
Report NAV

20. 20
Funds Within
Scope of
Provision
Investment Company attributes (946-10-15-2):
• Primary business is investing in assets for
current income, appreciation, or both
• Ownership represented by units of investment
to which proportionate share of net assets can
be attributed
• Funds of owners are pooled to facilitate access
to professional investment management
• Is the primary reporting entity
“Venture capital investment companies, including small
business investment companies and business
development companies” fall within the ambit of the
investment company definition

21. 21
Availability of
Practical
Expedient
Practical expedient for fair value
measurement of ownership interests in
an investment vehicle if:
• The ownership interests do not have
readily determinable fair value
• The vehicle possesses all of the attributes
of an investment company, or the industry
practice relevant to the vehicle is
consistent with the reporting practices
required of investment companies

22. 22
Practical
Expedient:
Using Reported
NAV
As a practical expedient, the fair value of an
interest in an investment vehicle may be
estimated using net asset value per share
reported by the company, provided:
• Calculation of the reported net asset value is
consistent with fair value measurement
principles (pursuant to ASC 946 Financial
Services – Investment Companies)
• Net asset value per share was obtained at the
measurement date
Adjustments to reported net asset value may be
appropriate if the preceding conditions are not
met

23. 23
Exception to
Practical
Expedient
The practical expedient is not available if
it is probable that an interest in the
investment company will be sold for a
price that is different from reported net
asset value
A sale is probable if:
• Management decides on a plan to sell the
interest
• Process of searching for buyers has begun
• The interest is available for immediate sale
• Significant changes to the plan are unlikely and
the plan will not be withdrawn

24. 24
06.
Disclosure Requirements

25. 25
Disclosure
Requirements:
Recurring
Measurements
For all recurring fair value measurements:
• The valuation techniques and inputs used
• If the use of unobservable inputs is significant to the
valuation, the effect of the measurement on earnings
and comprehensive income for the period
Due consideration to be given to:
• Level of detail necessary to satisfy disclosure
requirements
• How much emphasis to place on each requirement
• How much aggregation or disaggregation to undertake
• Whether users of financial statements need additional
information to evaluate quantitative disclosures

26. 26
Disclosure
Requirements:
Recurring
Measurements
For all recurring fair value measurements:
• The fair value measurement at the end of
the period
• The level of the fair value hierarchy within
which the fair value measurements are
categorized in their entirety
• Amount of transfers between Levels 1 and
2, reason for the transfers, and the policy
for determining when transfers are
deemed to have occurred

27. 27
Disclosure
Requirements:
Recurring
Measurements
(Levels 2 & 3)
For changes in valuation technique:
• Reasons for the change in technique
• For Level 3 measurements, quantitative
information about the significant
unobservable inputs used in the fair value
measurement
If the highest at best use of a nonfinancial
asset differs from current use:
• Disclose the fact, and;
• Explain why the asset is being used in a
manner other than its highest and best
use

28. 28
Disclosure
Requirements:
Recurring
Measurements
(Level 3)
For measurements using significant Level 3
inputs:
• Beginning balance
• Total gains or losses (both realized and
unrealized)
• Purchase and sales of assets
• Transfers in and/or out of Level 3
• Amount of total gains or losses included in
earnings attributable to unrealized gains or
losses
• A description of the valuation processes used
• A narrative description of the sensitivity to
changes in unobservable inputs, including
interrelationships, if any, among inputs

29. 29
Disclosure
Requirements:
Investments in
Entities that
Calculate NAV
Required disclosures for interests in
investment companies:
• Fair value of interests by major category,
including description of corresponding
investment strategies
• For interests that cannot be redeemed,
expected liquidation period of underlying assets
• Unfunded commitments related to interests
• Redemption terms and conditions
• Circumstances that may constrain redemption
features (e.g. gates)
• Other restrictions on sale of interests
• Fair value of interests whose sale is deemed
probable
• Intent to sell interests, if any

30. 30
Contact
Information
Travis W. Harms, CFA, CPA/ABV
901-322-9760
harmst@mercercapital.com
Jeff K. Davis, CFA
615-345-0350
jeffdavis@mercercapital.com
MERCER CAPITAL
Clark Tower
5100 Poplar Avenue, Suite 2600
Memphis, Tennessee 38137
www.mercercapital.com

31. 31
Portfolio Valuation
Services
Mercer Capital’s

32. 32
Fair Value
Scrutiny
“The SEC warned it would be looking more closely at
fund directors—and just sued eight former Morgan
Keegan fund directors for (alleged) inadequate
oversight of how fund holdings were priced. This
problem is only getting bigger.”
Barrons January 5, 2013
“Valuation is one of the most significant areas of
potential risks for funds, particularly those that hold
complex or thinly traded securities that must be “fair
valued”. As directors consider their risk oversight
responsibilities they should pay careful attention to the
adequacy of a fund’s valuation policies and
procedures.”
Mutual Fund Directors Forum – Practical Guidance for
Fund Directors on Valuation Oversight June 2012

33. 33
About
Mercer Capital
• Business valuation and financial advisory firm
founded in 1982
• Core competency is the valuation of private equity
and debt securities
• Valuation and positive assurance opinions
• Fairness and solvency opinions
• Transaction advisory
• Litigation support
• 400 assignments annually, primarily for domestic
entities
• 40 employees (employee-owned)
• Valuation and industry thought leaders

34. 34
Overview
of Services
Valuation
• Tax compliance
• Corporate valuation services
• Employee Stock Ownership Plan valuation
Transaction Advisory Services
• Fairness and solvency opinions
• M&A and investment banking services
• Buy-sell agreements and private company transactions
Financial Reporting
• Private equity, mutual fund, BDC, and other investment
company portfolio valuation services
• Purchase price allocation
• Impairment testing services
Litigation Support
• Expert testimony
• Business damages
• Shareholder disputes / divorce

35. 35
Financial
Reporting
Valuation
Services
Mercer Capital provides a comprehensive suite of valuation services to
assist boards of directors, portfolio managers, financial managers and
others with financial reporting requirements.
In an environment of increasingly complex fair value reporting standards
and burgeoning regulatory scrutiny, Mercer Capital helps clients resolve
fair value reporting issues successfully.
Mercer Capital fair value opinions are consistently accepted by the Big
Four audit firms and other reviewing entities.
Our professionals hold the Accredited in Business Valuation (ABV)
designation from the AICPA, the Accredited Senior Appraiser (ASA)
designation from the American Society of Appraisers and the Charter
Financial Analyst (CFA) designation from the CFA Institute.
Valuation Services for Investment Funds
• Portfolio Investment Valuation
• Fairness and Solvency Opinions
• Litigation Support
Valuation Services for Portfolio Companies
• Purchase Price Allocation
• Goodwill Impairment Testing
• 409A / Equity Compensation Valuation

36. 36
Key Industry
Verticals
Financials
• Depositories
• Asset managers
• BDCs
• Insurance
• Brokers and investment banks
Manufacturing
• Durable and non-durable goods
• Consumer and industrial
Healthcare
• Facilities companies
• Medical devices
• Staffing companies
Distribution and Transportation
• Wholesale distribution
• Asset-based transportation companies (all modes)
• Third-party logistics providers

37. 37
Senior
Professionals
Jeff K. Davis, CFA
• Managing Director
• 10 years with Mercer Capital
• Spent 13 years as a sell-side analyst covering small-
and mid-cap banks and specialty finance
• Weekly editorial contributor to SNL Financial
Travis Harms, CFA, CPA/ABV
• Senior Vice President
• 15 years with Mercer Capital
• Extensive financial valuation reporting experience,
including on behalf of private equity, BDCs and broker-
dealers

38. 38
Senior
Professionals
Z. Christopher Mercer, ASA, CFA, ABAR
• CEO / Founder (1982)
• Prolific author and thought leader on private security
valuation
• Has prepared and overseen over a thousand
valuations for M&A, tax, litigation and other matters
Matt Crow, ASA, CFA
• President
• 19 years with Mercer Capital
• Senior member of Mercer’s financial reporting
valuation group

39. 39
Senior
Professionals
Timothy R. Lee, ASA
• Managing Director
• 19 years with Mercer Capital
• Heads corporate valuation group with industry focus in
beverage, distribution, construction, retail and
transportation
Andy Gibbs, CFA, CPA/ABV
• Senior Vice President
• 14 years with Mercer Capital
• Has completed hundreds of bank and loan portfolio
valuations as head of the depository group for M&A,
ESOP, and other purposes