| The increasing importance placed by
authoritative accounting bodies on fair value has reinforced the
need to arrive at fair value that is consistent with generally
accepted accounting principles. Valuation challenges are
particularly acute for illiquid securities. Historically, many
illiquid investments have been valued at cost or written up based
upon an event such as the latest round of financing. Write-downs
were usually driven only by impairment or a down round of financing.
Today, such a limited approach is incompatible with the concept
of fair value. With the issuance of Statement of Financing Accounting
Standards (SFAS) 157, Fair Value Measurements, in
2007, new guidance for the measurement of fair value was
established. SFAS 157 also includes clarifications to the definition of
fair value. Increased volatility in financial markets combined with
reduced liquidity has focused attention on the role of current market
conditions on fair value. Yet by their very nature, illiquid securities
may have important differences and features that need to be properly
understood in the determination of fair value.
Our valuations of illiquid investments are performed in
accordance with SFAS 157. Engaging a third party to perform
valuations of illiquid investments is recommended for the following
reasons:
• Results in a more robust valuation policy and conforms to best
practices
• Provides the Board of Directors with another input into its
determination of fair value
• Independence
• Greater consistency and transparency
• Fulfillment of lender requirements for securities-based lending
• Experience in the application of required valuation framework and with
illiquid securities
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