Tannino Limited is a private investment company that manages investments for a group of about 30 wealthy individuals. The company is owned and managed by two experienced investment managers, each of whom owns 50% of the shares. The company merges all of its clients’ money into a single investment fund. At the end of each period, the investors’ investment accounts are increased or decreased by the percentage gain or loss for the entire investment fund.
A majority of the investments are in publicly traded companies, but a significant portion is invested in real estate and in private companies as ( quite speculative) venture capital. The company is preparing its financial statements for its first fiscal year ended 31 December 20X4. GAAP is not a constraint. The two owner- managers are discussing the proper method of reporting the company’s investment portfolio. On the one hand, they wish to present the most useful and relevant information to their investors, as well as to the bank that provides some debt financing. On the other hand, they are concerned about the reliability (i. e., faith-ful representation) of the reported asset values for various parts of the investment portfolio.
Discuss the trade- off between relevance and faithful representation for reporting the asset value of each of these various types of investments:
(1) Publicly traded securities,
(2) Real estate, and
(3) venture capital in start- up businesses. Your discussion must be relevant to Tannino Limited’s specific situation.