Direct equity investment - transaction price & fair value

[hubertd]

Hi Everyone,

I have the first direct equity investment to be made. The Company is listed and is seeking the additional equity funding issuing ordinary shares. As per the terms we will subscribe for ordinary shares at a price per share being a 5% discount to the 15 day volume weighted average price of shares on AIM prior to closing. My question is: which share price should I take to establish the fair value of the transaction? I expect the signing and announcement of our equity stake to result in substantial share price increase.

[JRSB]

The price you actually pay. Common for AIM companies to issue shares below the traded price when fundraising; there can be limited liquidity and volatility can be high. Price might spike when your investment is announced but doesn't mean you'd be able to offload your holding at that elevated price etc....

[hubertd]

But I still need to report my holdings at market price which with a spike can result in massive fair value gain pretty soon, correct?

[JRSB]

yes but maybe elect as PLOCI given the volatility expected?

[hubertd]

Ultimately, I will not need to worry about fair value changes as far as I can see. Given recent share price performance we'll apparently going to end up with +20% stake indicating the 'equity method'.

[Marek Muc]

Do either of you know if AIM is regarded as an active market? I.e. 'a market in which transactions for the asset take place with sufficient frequency and volume to provide pricing information on an ongoing basis.'

[JRSB]

Yes I'd think generally AIM would be L1 but I can see counterarguments depending on which company. Some people might hold at using other approaches.

[hubertd]

Just theoretically, if it wasn't the ''active market' what would be the implications? How would the fair value of such shares be established?

[JRSB]

you could use another valuation technique like cost, NAV or discounted cash flow or most recent fundraise or something

[JRSB]

I don't think an auditor will go for that for an AIM quoted equity

[Marek Muc]

If AIM is considered an active market, then IFRS 13.80 applies, so you wouldn't be able to use Level 2/3 inputs.