LOM 2023 Annual Report - Report - Page 43
LOM
2021 ANNUAL REPORT
or modified disclosures upon issuance of this Update and delay
adoption of the additional disclosures until their effective date.
ASC 820 clarifies the definition of fair value, establishes
a framework for measurement of fair value and expands
disclosure about fair value measurements.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC 820
applies to all financial instruments that are measured and
reported on a fair value basis.
Where available, fair value is based on observable market
prices or is derived from such prices. In instances where
valuation models are applied, inputs are correlated to a market
value, combinations of market values or the Company’s
proprietary data. The Company primarily uses the market
approach.
Market Approach
The market approach uses prices and other pertinent
information generated from market transactions involving
identical or comparable assets or liabilities. Valuation
techniques consistent with the market approach often use
market multiples derived from a set of comparables or may
include matrix pricing.
Income Approach
The income approach uses valuation techniques to convert
future values e.g. cash flows, or earnings to a single discounted
present amount. The measurement is based on the value
indicated by current market expectations about those future
amounts. Those valuation techniques include present value
computations, option pricing models and a binomial model.
In following these approaches, the types of factors the
Company may take into account in estimating fair value include
available current market data, including relevant and applicable
market quotes, yields and multiples, quotations received
from counterparties, brokers or dealers when considered
reliable, subsequent rounds of financing, recapitalizations and
other recent transactions in the same or similar instruments,
restrictions on disposition, the entity’s current or projected
earnings and discounted cash flows, the market in which the
entity does business, comparisons of financial ratios of peer
companies that are public, merger and acquisition comparable
and the principal market and enterprise values, among other
factors. Based on these approaches, the Company will use
certain assumptions that market participants would use in
pricing the asset or liability, including assumptions about
risk and/or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market
corroborated, or generally unobservable firm inputs. The
Company aims to use valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable
inputs. The Company uses valuation techniques it believes
are most appropriate to estimate the fair value of its portfolio
investments; however, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
There are inherent limitations in any estimation technique.
For investments in publicly held securities that trade on
exchanges, the Company generally uses the market approach,
except when circumstances, in the estimation of the Company,
warrant consideration of other data such as current market
prices for similar securities in cases where current market data
is not available or unreliable.
Many of the stocks and warrants held are in small cap
companies and are highly volatile with thinly traded daily
volumes. Sudden sharp declines in the market value of such
securities can result in very illiquid markets. Management
and the directors have taken all of these factors into account,
including the fact that some securities it holds are currently
restricted as to sale, in arriving at their best estimate of the fair
value of the securities.
The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair
values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in
a current market exchange and there can be no assurance that
the fair values for these investments will be fully realizable upon
their ultimate disposition or reflective of future fair values.
Because of the inherent uncertainty of valuation, the estimated
fair values of certain privately held investments may differ
significantly from values that would have been used had an
observable market for the privately held investment existed,
and the differences could be material.
Based on the inputs used in the valuation techniques described
above, financial instruments are categorized according to the
fair value hierarchy prescribed by ASC 820. The fair value
hierarchy ranks the quality and reliability of the information
used to determine fair values.
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