Goodwill impairments on the rise, with more likely to come

The number of goodwill impairments has increased dramatically in correlation with the plunge in stock prices in 2008, a new study of the market response to goodwill impairment announcements from PricewaterhouseCoopers concludes. According to Goodwill Impairment Implications in the Current Market Turmoil, from the third quarter 2008 through March 20, 2009, Fortune 500 companies announced approximately $230 billion of impairments—more than twice the total impairments recorded by Fortune 500 companies during the three years leading up to the third quarter 2008.

Using the week ending January 30, 2009 as a benchmark, the report notes that 30 companies announced impairments representing approximately $25 billion in charges.

“With further stock price declines in the beginning of 2009 and continued uncertainty in the markets, more goodwill impairment announcements are likely around the corner,” warns Alberto Dent, a partner with PricewaterhouseCoopers' Transaction Services practice, adding that “recent goodwill impairment announcements typically have had a muted effect on stock prices by the time of the announcement.”

The Appraisal Foundation (TAF) to create new working group

TAF’s “Task Force on Best Practices in Valuation for Financial Reporting” recently announced plans to form a third working group to, among other things, examine the following questions:

1. What constitutes the benefits of “control” that would justify a fair value of a business or reporting unit greater than its market capitalization?
2. Should a control premium be applied to the present value of free cash flows in a discounted cash flow enterprise valuation? Conversely, should the benefits of control be quantified and included in the free cash flows in a discounted cash flow enterprise valuation?
3. Should a control premium be applied to the indicated fair value of a business or reporting unit derived by a market approach using guideline company valuation multiples?
4. How is the control premium quantified and applied in a market approach? Conversely, should the fair value of a business or reporting unit be estimated through the market approach using guideline transaction multiples?
5. How can the sum of the fair values of multiple reporting units be reconciled to the market capitalization of the consolidated entity?

Interested in participating? You have until the close of the business day on April 30 to download an application and submit it to Paula Douglas Seidel.

BV Glossary—now with more definitions!

BVR has taken the International Glossary of Business Valuation Terms 2001—which contains definitions commonly agreed on by the American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, National Association of Certified Valuation Analysts, and the Institute of Business Appraisers—and added 75 new definitions. The result is a more expansive source for BV definitions. A few examples:

—Average Revenue Per Unit (ARPU): a measure of the revenue generated per user or unit. This measure allows for the analysis of a companies revenue generation and growth at the per unit level, which can identify which products are high or low revenue-generators. (investopedia.com)

—Seller’s Discretionary Earnings: (as defined by BIZCOMPS®) – seller's discretionary earnings is defined by BIZCOMPS® as net profit before taxes and any compensation to owner plus amortization, depreciation, interest, other non-cash expense and non-business related expense and normally to one working owner. (BVMarketData.com)

—Z-Score: a statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy. A z-score of 0 is equal to a 50% probability of bankruptcy. (investopedia.com)

This comprehensive new list, BVR’s Glossary of Business Valuation Terms, is available for download at our Free Resources page.

AICPA offers comment on SEC Roadmap

In a comment letter submitted last Thursday to the Securities and Exchange Commission (SEC) on its proposed Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Reporting Standards by U.S. Issuers, the American Institute of Certified Public Accountants (AICPA) voiced its support. The letter—authored by Institute chair Ernest Almonte and president Barry Melancon–notes that the “AICPA supports the goal of a single set of comprehensive accounting standards to be used by public companies in the preparation of transparent and comparable financial statements across the world and believes that one common accounting language would benefit investors as well as issuers. The AICPA said it believes that the standards issued by the International Accounting Standards Board (IASB) are best positioned to become those global standards.”

Hiring and firing during the recession: BV firm insiders speak

Respondents to an exclusive BVWire™ survey on recruitment and retention were guardedly optimistic about their firm’s hiring prospects in the near and longer term. Indeed, the survey clearly reflects a “glass-half-full” mentality, with some respondents believing now’s the time to snag higher quality talent and prepare for the growth that is ahead in areas like shareholder disputes, forensic services tax/estate, family/matrimonial, and bankruptcy work.

For a fuller picture of the data and an insider’s perspective on the topic from BV firm recruitment expert, John Borrowman, see the upcoming May 2009 issue of Business Valuation Update. In the interim, respondents’ comments should prove insightful:

• “This is a great opportunity to hire talent if you also have the ability to wait this out and be poised for whatever comes next. Fantastic time to build infrastructure, create awareness in the marketplace, and get one’s house in order.”
• “[There is a] slowdown in M&A activity and the SFAS 141 business is slow. However, with falling stock prices, we have seen an increase in SFAS 142. In addition, cash strapped employers may begin issuing stock options as a way to retain talent so we expect to see stock option valuations rise.”
• “Clients are holding onto their money and delaying hiring professionals, if possible. They also tend to be more price sensitive, but in general, business is steady. We have been able to hire talented personnel, due to our firm culture more than anything else, but there are also more qualified candidates available.”
• “More people will be available, but many will not have the right background.”
• “We are getting access to better qualified individuals who might otherwise choose to go work for a larger firm.”
• “The potential client base is smaller as companies go out of business. Congress could have larger affect than the current economy, with proposed changes in estate tax law and possible elimination of certain valuation discounts.”
• “The economic down turn has created opportunities in both tax and dispute resolution. Financial reporting and tax assignments are increasing for both asset impairment and gifting. During stressful economic times, disputes including shareholders and divorce also increase. The biggest problem is availability of qualified appraisers. We are actively engaged in a search for good people to add to our practice.”
• “We have seen significant drop off in our volumes of "regular" BV work and also BV in litigation.”
• “The opportunities for valuation, litigation, and forensic services are out there. You have to work a little harder than in the past to get them. Too many people don't want to market their services and as a result see their practices decline. Attorneys, bankers, CPAs, insurance agents, etc. are prime markets for new work.”
• “It seems to have slowed a little. I try to increase my referral base since each engagement is a "one-of" and must be immediately replaced.”
• “I am a sole practitioner and, fortunately, have seen little if any affect on my practice from the current economic conditions, so far.”
• “With the slowdown in M&A activity, clients are holding onto their money and delaying hiring professionals. They also tend to be more price sensitive. But in general, business is steady. We have been able to hire talented personnel, I think due to our firm culture more than anything else, but there are also more qualified candidates available.”