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EVCA warns against dangers of IAS 27

The European Private Equity and Venture Capital Association has warned that International Accounting Standard 27 could be applied to private equity funds in Europe, even though it has been ruled that all investment companies in the US will be exempt from similar measures, with serious and damaging consequences.

IAS 27 demands consolidated accounts, which for private equity firms would mean merging the profits and losses of whole funds, total portfolios, and the management company, in single sets of figures.

The combination of new investments with those that have been held longer and are therefore more profitable or nearing exit, as well as the merging of disparate sectors, each subject to their own industry cycles, would present a ‘grossly misleading impression of individual funds and portfolios,’ according to the EVCA.

The losses or weaknesses of some companies would be obscured behind the profits and strengths of others and vice versa. Specific developments affecting the profits of a company, such as the appointment of a new CEO, would be masked, as would specific problems.

‘IAS is a step forward in harmonising accounting standards for companies that are about profit and loss. But businesses in receipt of venture capital or private equity are less about profit and loss than about building value through innovation, through the ability of experienced fund managers to identify value in a product or a business unforeseen by other financiers, and through continued financial support for a company with perceived potential to weather adverse market conditions,’ the EVCA said.

‘The private equity and venture capital industry is still young in most European countries, particularly those acceding to the EU in 2004. This measure will not aid its continuing development.’

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