US GAAP and IFRS considerations

Private equity and consolidated financial statements

19 December 2008

Table of contents

EXECUTIVE SUMMARY............................................................................................1 BACKGROUND .........................................................................................................3

Private equity fund structures ................................................................................................................ 4

ACCOUNTING LITERATURE OVERVIEW ..................................................................5

US GAAP............................................................................................................................................... 5 Background ................................................................................................................................... 5 FIN 46(R)..................................................................................................................................... 6 EITF 04-5 ...................................................................................................................................... 6 IFRS ..................................................................................................................................................... 9 Specialized accounting ................................................................................................................... 9 General consolidation framework .................................................................................................... 9 Application of IFRS to private equity.............................................................................................. 10

NEXT STEPS ..........................................................................................................13 APPENDIX ASUMMARY OF US GAAP AND IFRS CONSOLIDATION IMPLICATIONS TO PRIVATE EQUITY ....................................................................14

US GAAP and IFRS considerations Private equity and consolidated financial statements

Executive summary

With the SECs issuance of a roadmap for the potential use of IFRS by US issuers, alternative asset managers and users of the financial statements of both the manager and underlying investment funds are seeking to better understand the accounting and reporting differences between US GAAP and IFRS1. This paper which is the first in a series of IFRS considerations for private equityexplores the similarities and differences in the accounting for consolidated financial statements between US GAAP and IFRS.

An analysis of the similarities and differences between US GAAP and IFRS is more complex for consolidation accounting because not only are there current differences between the two, but also because the FASB and IASB have each exposed changes to their respective requirements that will not necessarily result in full convergence. Moreover, the standard setters projects are not expected to be completed on the same timetable, potentially resulting in different effective dates for adoption of the respective amendments. The resulting differences in the accounting for consolidated financial statements between US GAAP and IFRS can be more pronounced for alternative asset managers and users of the related financial statements for several reasons, including:

US GAAP provides specialized accounting for an investment company, but IFRS has no investment company concept. As a result, investment vehicles are not exempted from applying all of IFRSs accounting requirements, including the need to consolidate controlled investees. In contrast, US GAAP provides that an investment company may consolidate only another investment company; an investment company would not consolidate a controlled investee that is not an investment company under US GAAP. The IASBs recently-issued proposal to amend IAS 27(R)while not entirely clearcould be read to indicate that a general partner of a private equity fund would be required to consolidate that fund, even if the private equity funds limited partners have substantive kick-out or liquidation rights. IFRS requires a parent to prepare consolidated financial statements using uniform accounting policies for like

The SEC issued a proposed roadmap on the potential use of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) in financial statements prepared by US issuers. The roadmap sets forth several milestones that, if achieved, could result in the mandatory use of IFRS in financial statements filed with the SEC by US issuers beginning in 2014, 2015, or 2016, depending on the size of the issuer, and allows early adoption for years ending after 15 December 2009 by a limited number of large issuers that participate in an industry in which the use of IFRS is more prevalent than any other basis of accounting.

US GAAP and IFRS considerations Private equity and consolidated financial statements

transactions and other events in similar circumstances. US GAAP has no such explicit requirement.

The SEC staff has generally provided that general partners or managing members of limited partnerships or limited liability companies, respectively, may not elect to measure at fair value their equity investments in unconsolidated partnerships or LLCs. IFRS allows this under certain circumstances. Investors in a private equity fund (that is, the limited partners) often measure their investments using fair value under US GAAP (such as pension plans). Consequently, IFRS-based financial statements of the private equity fund that present consolidated financial information of the underlying investees at historical cost may provide less decision-useful information with which to evaluate fund (and manager) performance.

This paper primarily provides considerations in understanding the consolidation accounting similarities and differences between US GAAP and IFRS. These considerations affect private equity managers as well as the private equity funds themselves. To accomplish this, this paper is organized to include a background of a private equity fund. The paper then summarizes the key principles underlying consolidated financial statements of US GAAP and IFRS both under current and proposed requirements. This paper concludes by providing additional implications for alternative asset managers of applying IFRS. Readers should note that IAS 27 may not be universally applied in a manner consistent with the approach described in this paper. While this paper identifies considerations in understanding the similarities and differences between US GAAP and IFRS in the area of consolidation accounting for private equity, it is not exhaustive, and other differences between US GAAP and IFRS may also exist. Further, while this paper discusses the US GAAP and IFRS consolidation requirements relating to private equity, its conceptual discussion also applies to other industries and structures. Future papers will explore additional implications of private equitys potential move to IFRS-based reporting

Other considerations also exist for private equity managers contemplating adopting IFRS, including some that are not accounting related. For example, as described previously and further in this paper, a private equity fund reporting under IFRS is required to consolidate controlled investees. Based on this requirement, a private equity funds external auditor may not be able to issue an opinion on the consolidated financial statements if it is not the principal auditor of the fund given the relative size of controlled investees that are audited by another auditor.

An analysis of the similarities and differences between US GAAP and IFRS is more complex for consolidation accounting because not only are there current differences between the two, but also because the FASB and the IASB have exposed changes to their respective requirements that will not necessarily result in convergence.

US GAAP and IFRS considerations Private equity and consolidated financial statements

Background

A private equity fund, which is typically organized as a partnership, obtains commitments from certain qualified investors such as pension funds, financial institutions, and wealthy individuals to invest a specified amount as limited partners. The general partner calls the required equity capital when it identifies an investment opportunity, and the limited partners fund a pro rata portion of their capital commitments. Private equity funds primarily focus on illiquid investments in private securities, including preferred stock, common stock, investments in other private funds, debt securities/bridge loans, options, and warrants.

All investment decisions are typically made by the general partner, who also manages the private equity fund's portfolio of investments. A private equity funds life is generally ten years. The investors usually are subject to lock-up provisions, which prohibit them from selling, transferring, or encumbering their interests without the prior approval of the general partner for the entire life of the private equity fund. While there may be a limited secondary market for the limited partner interests, such interests are not tradable without the prior approval of the general partner. The general partner is compensated with a management fee, which is typically a percentage of the private equity fund's total equity capital funded or committed, as well as a carried interest, defined as a percentage of profits generated by the private equity fund (after a specified minimum return by limited partners is achieved). Typically, general partners of private equity funds will receive a management fee of 2% and carried interest of 20%. In certain private equity structures, the general partners right to receive either the management fee or the carried interest is assigned to an affiliate of the general partner, such as an advisor.

US GAAP and IFRS considerations Private equity and consolidated financial statements

In a fund of funds structure, the private equity fund invests in other investment partnerships that may not be managed by the same general partner. Simplified examples of these two structures are presented below:

Private equity fund structures

Advisor

General partner

Limited partner

Management fee

GP investment

Carried interest

LP investment

Private equity fund Equity Equity

Debt Lender X Investee A Investee B

Debt Lender Y

Private equity fund of funds

LP investment

LP investment

PE investment partnership A

PE investment partnership B

PE investment partnership C

US GAAP and IFRS considerations Private equity and consolidated financial statements

Accounting literature overview

US GAAP
Background
Consolidation by the private equity fund
While private equity funds are not registered pursuant to the Investment Company Act of 1940, for accounting purposes they are generally considered investment companies pursuant to the scope of the AICPA Audit and Accounting Guide, Investment Companies (the Guide)2. As such, private equity funds generally do not consolidate controlled investees, but instead measure their investments at fair value in accordance with the Guide3. Investors in and managers of a private equity fund first apply FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities an interpretation of ARB No. 51 (FIN 46(R)), to determine whether the private equity fund is a variable interest entity (VIE). If the private equity fund is a VIE, FIN 46(R)s provisions must be followed, as described later. If the private equity fund is not a VIE, the private equity fund should primarily be evaluated for potential consolidation by each party to the fund pursuant to EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5). Other literature should also be considered, including but not limited to Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, and EITF Issue No. 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements.

Consolidation of a private equity fund by investors and managers

In general, a parent consolidates a subsidiary when it has a controlling financial interest in that subsidiary. While the usual condition for control is ownership of a majority (over 50%) of the investees outstanding voting stock, the control may also exist when a parent absorbs a majority of a variable interest entitys expected losses. Control may also be conferred by contract.

AICPA Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (SOP 07-1), which provides guidance for determining whether an entity is within the scope of the Guide, has been delayed indefinitely. Investment companies that are subject to SEC Regulation S-X, Rule 603(c)(1) should not consolidate any entity that is not also subject to that same rule. However, registered investment companies should not apply the provisions of FIN 46(R) in making that determination. US GAAP and IFRS considerations Private equity and consolidated financial statements 5

FIN 46(R)
As previously described, the first step in applying US GAAPs consolidation requirements is to determine whether the private equity fund is a VIE. FIN 46(R) requires several determinations to be made including whether (1) the entity lacks sufficient equity, (2) the entitys equity holders lack adequate decision making authority, and (3) the equity holders have the obligation and right to absorb the entitys expected losses or to receive its expected residual returns. A private equity fund that is a VIE is subject to FIN 46(R)s provisions and is to be evaluated for consolidation based on the rights and obligations of holders of all variable interests in the entity and not based on the ownership of outstanding voting shares. As further background, to determine a VIEs primary beneficiary, the quantification and allocation of potential variability in an entitys returns to its variable interest holders may be required. Estimates of a number of possible future outcomes of the entity, as well as the probability of each outcome occurring, need to be prepared. The results of each possible outcome are allocated to the parties holding variable interests in the VIE. Based on the allocation of these possible outcomes, the party, if any, that absorbs a majority of the entitys variability is the VIEs primary beneficiary and is required to consolidate the VIE. As a practical matter, a private equity fund is likely to be a VIE if the general partner does not have a substantive atrisk equity investment and the limited partners do not have substantive kick-out rights. Our experience also has indicated that a general partner to a private equity fund that is a VIE is typically required to consolidate that private equity fund because of FIN 46(R)s related party and de facto agent provisions. FIN 46(R) provides that a party is considered to be a de facto agent if it has an agreement that it cannot sell, transfer, or encumber its interests in the entity without the prior approval of another party. In many private equity funds, the general partners place such restrictions on the limited partners. Consequently, the general partner has a de facto agent relationship to each limited partner in the private equity fund.
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Because the group of related parties and de facto agents holds variable interests in the private equity fund that, if held by a single party, would identify that party as the primary beneficiary, a determination must be made as to which party within the related party group is most closely associated with the private equity fund. While FIN 46(R) provides several factors in making this determination and states that judgment is to be applied based on all relevant facts and circumstances, our experience has indicated that the general partner is often identified as the private equity funds primary beneficiary. Consequently, if a private equity fund were considered to be a VIE, the general partner would typically be required to consolidate that private equity fund.

EITF 04-5
A private equity fund that is not a VIE is evaluated for potential consolidation as a voting interest entity pursuant to EITF 04-5s provisions. In general, EITF 04-5 provides that the general partner (or managing member of an LLC that is considered similar to a partnership for accounting purposes pursuant to EITF Issue No. 03-16 Accounting for Investments in Limited Liability Companies) is presumed to control the limited partnership. A general partner or managing member can overcome the consolidation presumption if the limited partners have (1) substantive kick-out rights, (2) liquidation rights, or (3) substantive participating rights, as each of those terms is defined in EITF 04-5. Substantive kick-out rights have both of the following characteristics:

The kick-out rights can be exercised by a vote of a simple majority of the limited partners voting interests held by parties other than the general partner(s), entities under common control with the general partner(s), and other parties acting on behalf of the general partner(s). The limited partners holding the kick-out rights have the ability to exercise those rights if they choose to do so. That is, there are no significant barriers to the exercise of those rights. Barriers include, but are not limited to:

US GAAP and IFRS considerations Private equity and consolidated financial statements

(1) Kick-out rights subject to conditions that make it unlikely that they will be exercisable (2) Financial penalties or operational barriers associated with exercising the kick-out rights that would act as a significant disincentive for exercising those kick-out rights (3) The absence of an adequate number of qualified replacement general partners or lack of adequate compensation to attract a qualified replacement (4) The absence of an explicit, reasonable mechanism in the limited partnership agreement or applicable laws or regulations by which the limited partners holding the rights can call for and conduct a vote to exercise those rights (5) The inability of the limited partners holding the rights to obtain the information necessary to exercise them. To be substantive, liquidation rights must have the above characteristics (where applicable) and provide for the immediate suspension of activities and orderly liquidation of the investment portfolio.

The Proposed Amendments would significantly change the application of FIN 46(R). While the Proposed Amendments would not modify the criteria used to determine whether an entity is a VIE, in general, the Proposed Amendments would require each investorincluding the general partnerto perform a qualitative analysis to determine whether that investors variable interest(s) give it a controlling financial interest. An enterprise would be required to consolidate a VIE if it has both of the following characteristics:

The power to direct matters that most significantly impact the VIEs activities including, but not limited to, activities that impact the entitys economic performance The right to receive benefits from or the obligation to absorb losses of the VIE that could potentially be significant to the VIE

Proposed amendments to FIN 46(R)

In response to constituent concerns about the application of certain key provisions of FIN 46(R), the FASB has issued for comment proposed amendments to FIN 46(R) (Proposed Amendments).

Importantly, as proposed, in evaluating the power criterion, substantive kick-out or liquidation rights cannot be considered unless those rights are held unilaterally by a single party. Accordingly, a general partner to a private equity fund that is a VIE would be required to consolidate that fund unless substantive kick-out or liquidation rights are held by only one party. Given most private equity funds have numerous investors, the general partner would be required to consolidate its investee private equity fund that is a VIE.

US GAAP and IFRS considerations Private equity and consolidated financial statements

The Proposed Amendments implicitly introduce the concept of current control. Under this concept, the party that currently controls the investeewithout regard to the fact that the substantive kick-out or liquidation rights could be exercisedwould consolidate the investee. The parent would presumably deconsolidate the investee under this model only when the limited partners exercised their removal or liquidation rights. Practically, the general partner would be in control of (and thus be required to consolidate) every partnership that is a VIE until such time as it were voted to be removed or the fund liquidated. The concept of current control for VIEs differs from US GAAP consolidation requirements for entities that are to be evaluated for consolidation based on their outstanding voting interests, which require only the possibility that the general partner could be removed or the fund liquidated. Other US GAAP addressing consolidated financial statements generally does not require an assessment of the likelihood that the kick-out or liquidation rights will be exercised. Indeed, in applying EITF 04-5, the mere existence of substantive kick-out or liquidation rights held by the limited partners as a group precludes the general partner from consolidating the fund.

Commentators cited this inconsistency in comment letters to the FASB. In response, on 17 December 2008, the FASB agreed to redeliberate this aspect of its proposal. Readers should closely monitor developments in this area. The Proposed Amendments retain, however, the requirements (1) to aggregate variable interests held by the investor and its related parties and de facto agents and (2) to identify the primary beneficiary in the group as the party that is most closely associated with the VIE. Because the Proposed Amendments retain FIN 46(R)s related party and de facto agent provisions, even if the FASB were to conclude in its redeliberations that substantive kick-out or liquidation rights held by more than one party should be considered in applying the power criterion, for the reasons described previously, the general partner would likely continue to be the primary beneficiary of (and thus required to consolidate) a private equity fund that is a VIE.

The concept of current control for VIEs differs from US GAAP consolidation requirements for entities that are to be evaluated for consolidation based on their outstanding voting interests, which require only the possibility that the general partner could be removed or the fund liquidated.

US GAAP and IFRS considerations Private equity and consolidated financial statements

IFRS
Specialized accounting
IFRS has no specialized consolidation principles for private equity funds or investors in private equity funds. All entities are required to apply IAS 27, Consolidated and Separate Financial Statements (IAS 27), and SIC Interpretation 12, Consolidation Special Purpose Entities (SIC 12), to determine whether they control and thus should consolidate their investees. IAS 27 specifically notes that a subsidiary is not excluded from consolidation simply because the investor is a venture capital organization, mutual fund, unit trust, or similar entity. The IASB sees the fact that a subsidiary is controlled as a significant fact, and that consolidation should be applied to all controlled entities by all investors, irrespective of their industry or the strategy for holding the investment. In applying IAS 27, potential voting rights that are currently exercisable or convertible should be considered. Warrants, share call options, debt, and other instruments that are currently convertible into ordinary shares that, if exercised or converted, give the entity voting power should be considered in determining whether the entity has the power to govern the financial and operating policies of another entity. While all facts and circumstances must be examined in assessing whether potential voting rights contribute to control, IAS 27 specifically provides that the intention of management and the financial ability to exercise or convert should not be considered. While the consolidation model in IAS 27 is based primarily on the legal and contractual rights of shareholders, SIC 12 addresses consolidation through economic control. SIC 12 addresses the consolidation of special-purpose entities (SPEs) for which determining control may be more difficult because of the inherent limited decision making over the entitys activities. SIC 12 does not define an SPE, but describes the types of activities in which it may engage. SIC 12 generally requires an evaluation of the SPEs and investors decision-making powers and their potential benefits and risks in determining whether an SPE should be consolidated. SIC 12 states that determining whether or not an entity controls an SPE is a matter of judgment based on the relevant facts and circumstances.

General consolidation framework

IAS 27 provides that a parent has control when it has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IAS 27 states that control is presumed to exist if the parent directly or indirectly owns more than half of the voting power of an entity. Control is also considered to exist when the parent does not own a majority of the voting rights when there is: (a) Power over more than half of the voting rights by virtue of an agreement with other investors (b) Power to govern the financial and operating policies of the entity under a statute or an agreement (c) Power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body (d) Power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body

US GAAP and IFRS considerations Private equity and consolidated financial statements

Application of IFRS to private equity

Private equity fund considerations
Based on the previously-described considerations, a typical private equity fund will generally have the power to govern the financial and operating policies of an investee and can obtain benefit from its activities through the potential return on its investment. If so, the private equity fund would be required to consolidate its investees. In this case, the private equity fund would not be able to only recognize its investments and measure them at their fair values, similar to US GAAP.

Proposed IFRS
On 18 December 2008, the IASB issued a proposal to replace IAS 27 and SIC 12 with a new consolidation model. Under the proposed definition, a party would control an entity when it currently has power sufficient to enable it to manage the economic activities of that entity for its benefit by generating returns from those activities. The definition of control requires that the controlling party benefit by generating returns from its involvement with an entity and being able to affect those returns from its power over that entity. Therefore, benefits and power are related and must be considered together when determining whether a party controls an entity. The proposed control model would apply to the whole spectrum of entities through which an entity can conduct its business. As the proposed control model would be universally applied, the IASB does not need to define the term SPE, or an equivalent, in its proposal. The proposed control model would capture both traditional corporate entities and more complex business structures. The proposal would clarify that a party holding the single largest ownership interest in another entity can control that entity, even if this represents less than half of the voting power. Consistent with IAS 27, the proposed consolidation model would not exempt parent entities that are venture capital organizations, mutual funds, unit trusts, or similar organizations from having to apply the full consolidation procedures to any entity they control.

General partner considerations

In applying IFRS to a private equity fund, it must be assessed whether the general partner has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. Through its management and performance fees, we generally believe that a general partner of a private equity fund has the potential to benefit from its activities. Neither IAS 27 nor other IFRS provide specific guidance on whether and how substantive kick-out or liquidation rights should be considered in determining whether the general partner has the power to govern the financial and operating policies of an entity. We generally believe that substantive kick-out rights or liquidation rights prevent a general partner from controlling (and thus consolidating) a private equity fund. Accordingly, we do not believe there is a difference between current US GAAP and IFRS when the limited partners have substantive kick-out rights or liquidation rights; in both cases the general partner would not consolidate the private equity fund.

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US GAAP and IFRS considerations Private equity and consolidated financial statements

The proposed consolidation model would also acknowledge that a reporting entity might act as an agent of another party (or parties). It further would indicate that the reporting entity does not control another entity if it must use its decision-making powers in that entity for the benefit of another party (or parties). The proposal also indicates that if a service providers fees are significant relative to the total expected returns of the entity, the service provider is not an agent. The proposal could be read to significantly change the accounting required by IAS 27. Under this reading, only current rights (and not potential voting rights) should be considered in determining whether an entity controls another. As such, although the limited partners in a private equity fund may have kick-out rights over the general partner, the general partner would control (and thus consolidate) the partnership until the kick-out rights were exercised. The IASBs proposal is not entirely clear on this point, however. Readers may wish to comment to the IASB. If this reading is correct, a private equity fund would continue to consolidate its controlled investees. The private equity fund, in turn, would be consolidated by the general partner, even if the limited partners have substantive kickout rights over the general partner. This reading of the proposal would create a significant change in practice under IFRS and create a significant difference between current US GAAP and IFRS, if finalized.

While the proposal is not clear, we generally do not believe a general partner would be able to assert that it is acting as an agent of the limited partners in managing the fund. Indeed, while a general partner has a fiduciary duty to its limited partners, the general partner is also a principal with respect to its own funds invested and its potential to receive an incentive fee. Moreover, as previously noted, the IASBs proposal would provide that if the service providers fees are significant relative to the total expected returns of the entity to which the services are provided, the service provider would not be considered an agent. Because the general partners carried interest often approximates 20 percent of profits (as defined in the partnership agreement), that fee could be viewed as significant relative to the total expected returns of the fund. Based on this provision and interpretation, it is likely that a private equity manager would not be considered an agent of a private equity fund under the proposal, given the significance of the carried interest to the total expected returns of the private equity fund. As such, the general partner would be required to evaluate a private equity fund for potential consolidation.

Other considerationsuniform accounting policies and reporting dates

In consolidating investees, uniform accounting policies for comparable transactions and other events in similar circumstances must be used. (In contrast, US GAAP has no specific requirement to conform the accounting policies used by the consolidated group.) A private equity fund and its investees often have different reporting dates. IFRS provides that a subsidiary should prepare financial statements as of the parents reporting date, unless impracticable. In that case, the financial statements of the subsidiary at a different date may be used so long as the difference between the reporting dates is no more than three months and the length of the reporting periods and any difference in reporting dates is the same from period to period. Adjustments are made for significant transactions or events that occur between the reporting dates of the subsidiary and that of the parent.

US GAAP and IFRS considerations Private equity and consolidated financial statements

11

General partners election to measure its interest at fair value

For US GAAP, the SEC staff has indicated that a general partner may not elect to measure at fair value its general partnership interest in an unconsolidated partnership in accordance with FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (Statement 159). While Statement 159 permits entities to choose to measure equity method investments at fair value, with changes in fair value recognized in earnings at each reporting date, the SEC staff believes a general partner may have a substantive nonfinancial performance obligation embedded in the interest. As such, applying the fair value option to it with such an embedded feature could effectively recognize or accelerate revenue that otherwise would be inappropriate based on the relevant accounting principles. A general partner with a carried interest was cited by the SEC staff as such an example of an interest that may not be elected to be measured at fair value in accordance with Statement 159.

In contrast, IAS 28, Investments in Associates (IAS 28), provides that investments in associates (which are by definition not controlled) held by venture capital organizations may be classified upon initial recognition as held for trading in accordance with IAS 39, Financial Instruments: Recognition and Measurement. Such investments changes in fair value would be recognized currently in earnings. A general partner interest in an unconsolidated partnership that is held by other than a venture capital or similar organization is accounted for under the equity method and may not be measured at fair value under IAS 39.

Principal auditor
A private equity fund that holds investees that are audited by different audit firms must determine whether the auditor of record can be designated as the principal auditor. Depending on the size of the consolidated investees assets that are audited by other firm(s), the auditor of records scope may be insufficient with which to render an opinion.

A typical private equity fund will generally have the power to govern the financial and operating policies of an investee and can obtain benefit from its activities through the potential return on its investment.

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US GAAP and IFRS considerations Private equity and consolidated financial statements

Next steps

The FASB has begun redeliberations of its proposed amendments to FIN 46(R). A final standard is expected to be issued by mid-2009 with an effective date of 1 January 2010 for calendar year companies. Comments on IASBs proposal to amend IAS 27 are due by 20 March 2009. This paper has shown that there are significant differences between US GAAP and IFRS reporting by private equity funds and their managers. We strongly encourage US preparers and users of financial statements to provide comments to the IASB.

US GAAP and IFRS considerations Private equity and consolidated financial statements

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Appendix ASummary of US GAAP and IFRS consolidation implications to private equity

US GAAP Consolidation of investees by private equity fund Consolidation of private equity fund by general partner

IFRS

Not required if a private equity fund is an investment company. First determine whether the private equity fund is a VIE. If not a VIE, the general partner consolidates unless the unrelated limited partners have substantive kick-out, liquidation, or participating rights. If the entity is a VIE, determine whether the general partner and related party/de facto agent group absorbs a majority of the private equity funds variability. If so, determine the primary beneficiary (most likely general partner). As long as the policies are in accordance with US GAAP, accounting policies are not required to be consistent between members of the consolidated group, but it is encouraged. Subsidiary financial statements with reporting dates within three months of parents reporting date are generally accepted. The effect of intervening events that materially affect financial statements should be disclosed, but generally are not recognized.

Investees are required to be evaluated for consolidation. Determine whether the general partner has the power to govern operating and capital policies of private equity fund. Consider substantive kick-out, liquidation, or participating rights held by unrelated third parties in this determination. Consider whether the private equity fund might be an SPE based on SIC 12s provisions.

Accounting policies

Accounting policies are required to be consistent among members of the consolidated group.

Reporting dates

Subsidiary financial statements should be as of same reporting date as parent unless impracticable. In that case, reporting date cannot be more than three months apart. Adjust for effects of significant transactions or other events between reporting dates of subsidiary and parent.

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US GAAP and IFRS considerations Private equity and consolidated financial statements

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