August 23 , 2006 | | Issue 47-4

Pension Protection Act is more routine than reform, for BV

Last week President Bush signed the Pension Protection Act, making it Public Law No: 109-280. The ASA—whose commendable efforts led to the inclusion of certain reforms—is calling the law a “landmark victory” for its members. But for business valuators, “appraisal reform is a misnomer,” says Mike Crain, CPA, ASA, CFA, CFE (Financial Valuation Group, Ft. Lauderdale), the current chair of the AICPA Business Valuation Committee. “It’s not appraisal reform—it’s reform for exempt organizations,” Crain explains, in an interview with BVWire™. “Congressional members saw abuses in exempt organizations, and wanted to change the law regarding them and the people they interact with,” including appraisers.

The law does define “qualified appraiser and appraisals,” which includes business as well as real and personal property appraisers who work in the charitable sector. It also imposes penalties for “gross misstatements” of valuations on exempt-related tax returns. “That’s the first time, to my knowledge, that a tax law has made specific reference to appraisal standards,” Crain notes. But nothing in the law modifies appraisal standards in estate/gift taxation, where most business appraisers work. And though there’s talk about the IRS extending the reforms to estate/gift, “it’s unclear whether the IRS has the authority to do this.” Until the Congress or Treasury acts, Crain says, “it’s business as usual” for business appraisers.

For the provisions of the new law pertaining to appraisal penalties and reform, click here.

Excerpts from ‘BV on Trial’

Most forensic business appraisers know they’re going to get beaten up a bit when they take the witness stand. But in the recent In re Med Diversified, Inc. bankruptcy decision (BVWire™ #47-3), the appraisers didn’t appear to have a fighting chance. Witness the following excerpts from the transcript of testimony by plaintiff’s expert Robert Cimasi, MHA, ASA, CBA, AVA , FCBI, CM&A, CMP, president of Health Capital Consultants (St. Louis):

THE COURT: …I have a discreet understanding of my limitations, but I also have an understanding of what my experience tells me in having listened for the past 30 years to appraisers, and while they may not bear all the credentials and all the publications, I have yet to find an appraiser of value of non-real estate that ever says anything that’s cogent and persuasive. Go ahead. I’m always willing to be persuaded.

THE COURT: I’d love to finally found an appraiser who convinces me that through a rigorous application of a methodology, that person can effectively value a company. Several have tried. None have succeeded, no one as sophisticated as you, but in the universe of companies rather than real estate projects or cash flows, the science isn’t there yet, at least as you’re presenting it to me because I’m testing it at every single conceivable angle simply because I have a tremendous degree of skepticism….

THE COURT: I don't really care about your certifications, although I do appreciate that this is somehow made up by persons who have some professional standing in connection with some effort by the government to improve the quality and integrity of appraisals... So you don't need to go through all of these. I'm sure they're all noble, but I really want to know what cases you appeared in what books you've written or major articles.

Good news for FASB (and valuators) on pricing stock options

When the Financial Accounting Standards Board first proposed in 2004 that companies treat employee stock options as an expense—business leaders “all but stormed” the rule-makers with letters, public statements and protests, according to an AP article (available at But now it looks like FASB might have been on the right track in adopting the rule, in light of the widening federal probe of “backdating” abuses.

And it looks like business valuators have an even better business opportunity, as per the new FASB rule—and IRS regulation 409A—an “increasing number of private equity backed companies are hiring appraisers to determine the fair market value of their common stock,” says Joel F. Johnson, president of Orchard Partners Inc. (, in a recent issue of M&A Today. Likewise, the AICPA’s 2004 practice guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (, product # 006617) recommends hiring an appraiser when quoted market prices are not available, and when the value is not apparent from arms-length transactions.

More on the ‘fair market value v. fair value’ challenge

Thanks to the numerous experts who responded to last week’s challenge by Bruce Bingham, ASA, Trenwith Valuation, LLC (New York) to provide “a specific instance where fair market value and fair value are different.” Typical among them was the response by Dave Girbovan, ASA (Integra Tech, Los Angeles) who writes, “I must be missing something, because there is at least one clear example…when fair value and fair market value are different.” He cites the hypothetical of a 20% minority interest in XYZ Corporation, with an equity value of $1million. Under California law, in a minority shareholder dispute, the fair value would be the pro-rata share of the value of the equity, or $200,000. But in a gift tax scenario, the fair market value of the interest would be $200,000 less liquidity and minority discounts.

But here’s what may have been missing from the original challenge: Is the fair market value of the interest in the first scenario really any different than its fair value? And wouldn’t the accepted definition of fair value in the second scenario include applying the discounts? Hopefully that’s a clearer restatement of what Bingham was asking—and again, if you can meet the challenge, contact the BVWire editor, and you’ll get page one billing in Business Valuation Review as well as the BVWire™.

Two great new resources for company research

Blast from the past: When you need to value a company “back in time,” it might be useful to look at what they posted on the Internet in the past. The Internet Archive ( captures snapshots of web pages from as far back as 1996. Want to see what BVResources looked like in 2000? Click here.

Better Business Bureau Report database. Has anyone registered complaints against your subject company with the Better Business Bureau? And how has the company handled complaints? Find out at the new database, Reports vary based on business location and the local BBB.

To ensure this email is delivered to your inbox,
please add to your e-mail address book.
We respect your online time and privacy and pledge not to abuse this medium. To unsubscribe to BVWire™ reply to this e-mail with 'REMOVE BVWire' in the subject line or to modify your mailing list subscription simply visit using
your e-mail address and temporary password: bvwire

Copyright © 2006 by Business Valuation Resources, LLC

Business Valuation Resources, LLC | 7412 SW Beaverton Hillsdale Hwy., Ste. 106 | Portland, OR 97225 | (503) 291-7963

Editorial Staff
| Advertise in the BVWire | Copyright Notice