IVSC releases discussion paper on intangibles
The International Valuation Standards Committee (IVSC) has just released for comment its discussion paper Determination of Fair Value of Intangible Assets for IFRS Reporting Purposes. “As the International Financial Reporting Standards (IFRS) require increasing use of fair values for a greater range of assets and liabilities in financial accounts,” comments IVSC chairman Joseph Vella, “a clear gap in guidance is emerging.” An “Expert Group” drawn from international specialists—including Bruce Bingham (Chair) and Jay Fishman—developed the discussion paper, in particular to address brands, licenses, patents, “know-how,” customer contracts and relationships. Without guidance in these key areas, Vella says, “there is danger that valuation practitioners may take different approaches and have different interpretations of IFRS requirements.”
To read the discussion paper click here. The IVSC is soliciting comments through October 31, 2007 and expects to issue an exposure draft by the end of the year.
FASB is working on intangibles, too
At its most recent meeting, the Financial Accounting Standards Board (FASB) discussed how to resolve the inconsistency between the useful life estimated for amortization purposes pursuant to SFAS 142, Goodwill and Other Intangible Assets, and the periods of cash flows used in determining the fair value of an intangible asset. Among other decisions, the Board removed the concept of “material modification” in favor of using periods of undiscounted cash flows (adjusted for certain entity-specific factors). The Board also amended SFAS 142 to allow an entity to select an amortization pattern that best reflects the economic benefits of the intangible asset; if that pattern cannot be reliably determined then a straight-line amortization method may be used.
A complete update on SFAS 142 is available here. For its next meeting this quarter, the Board is planning to draft alternatives for renewal costs, method of amortization, disclosures, transition and effective date.
Hi-tech creates ‘new math’ for entertainment valuations
Technology advances (most recently, Sling Media’s laptop access to DirectTV accounts from anywhere in the world through Sling Box), may improve consumers’ access to media but can negatively impact media companies valuation. “Filmed-entertainment companies must now demonstrate the ability to generate nearly $1 billion in revenues to be valued at $1.5 billion,” says David Davis, on his FMVEntertainment news blog, “while some technology companies (taking YouTube as the most recent high-profile example) are sold for $1.5 billion before they make a dollar of profit.”
Forecasting feature film performance in the DVD market is another area where the “old valuation math has gone out the window,” now that film companies can price titles for initial consumer purchase. In recent weeks, Davis’ blog has focused on valuation techniques to use in forecasting filmed-entertainment entities, all in preparation for BVR's next telephone conference, “Valuing Entertainment Assets.” Additional topics include valuation of television series, music properties, and the differences between appraising static catalogs and going-concerns. Tune in tomorrow, August 9, 2007, by registering here.
AICPA standards intended to resolve USPAP problems?
“I read with interest Mr. Durkin’s comments on USPAP [in last week’s BVWire™],” writes Jim Alerding (Clifton Gunderson LLP), “and his opinion that it should have been adopted by all of the ‘Societies.’ What Mr. Durkin fails to understand is that USPAP’s language is contrary in some important aspects to the language used by certified public accountants in the conduct of and reporting on audits, reviews, and compilations. Additionally, USPAP is, and has been since its inception, extremely poorly written. The AICPA Standards [see BVWire #57-4] were written, in part at least, to resolve both of these problems.”
Although Alerding serves on the AICPA’s Writing Task Force, his statements are his own opinions—and not those of the AICPA or Clifton Gunderson. As always, email your comments on this topic (or any other that appear in the ‘Wire) to the editor.
Does statutory fair value include a control premium?
Seven states have currently adopted the 1999 amendments to the Model Business Corporation Act, including its specific prohibition against applying minority and marketability discounts. (The states are Connecticut, Idaho, Iowa, Maine, Mississippi, Virginia and West Virginia; Florida has adopted a variation of the amended MCBA.) In a case of first impression, the Iowa Supreme Court just considered whether the new statutory definition of fair value requires appraising the corporate shares on a marketable, control basis.
The case begins with a quote from Janet Jackson (“It’s all about control”) and ends with lengthy (and favorable) citations to Shannon Pratt, including his comments on the best empirical evidence available to quantify a control premium and the effect of embedded synergistic values. A case abstract of Northwest Investment Corp. v. Wallace (July 13, 2007) will appear in the next issue of the Business Valuation Update™, and we’ve already posted the full-text of the opinion for subscribers of BVLaw™.
In the meantime, for a comprehensive overview of statutory fair value, including timely articles by Pratt, Fishman, Bill Morrison and others—plus a comprehensive summary of shareholder dissent and oppression statutes in all 50 states, categorized according to cases on the application of discounts—check out BVR's Guide to Fair Value in Shareholder Dissent, Oppression, and Marital Dissolution. For more information, click here.
VC industry feeling the impact of inflated valuations
"I’ve heard that the vast majority of VC funds have been in the red for nearly a decade. Is it true? If so, can the industry survive?" Those were the questions posed by PE Week Wire™ editor Dan Primack to a recent San Francisco gathering of National Venture Capital Association (NVCA) staffers. The answer: red faces and stone walls.
For a more telling source, Primack looked at the latest data from NVCA and Thomson Financial on VC performance (available here). “Venture capital performance continued to show positive returns across most investment horizons ending March 31, 2007,” the report said, citing average five-year returns for all VC at 2.7%, with far stronger performance for one-year (18.1%), three-year (9.6%), 10-year (21%) and 20-year (16.4%). “Only the five-year underperformed the Nasdaq or S&P 500,” Primack commented, “and that can be chalked up to venture getting hit particularly hard by the Internet bubble burst.”
But averages of the data may be artificially inflated by outstanding performance in the top two deciles. “A look at the medians reveals a much sorrier state of affairs.” Funds raised between 2001 and 2007 have a median rate of return of negative 2.6%. Moreover, the upper quartile benchmark of 4.1% means that “the vast majority of VC funds raised since 2001 have underperformed a typical savings account.”
Primack concludes by posing another, possibly rhetorical question. “VCs were paying relatively low valuations for companies between 2003 and 2005 (or at least should have been), and the IPO and M&A windows have been steadily improving. If most funds are losing money in that environment, then what happens when some of today’s inflated valuations—particularly in clean-tech and later-stage deals—come home to roost?”
ABA newsletter on option pricing, Daubert, and more
The current issue of eSource™, the monthly newsletter from the Business Law Section of the American Bar Association, features two articles of interest to valuation specialists, their clients and attorneys. The first, on “Dealing with Problematic Practices,” identifies the “landmines” public companies may face in connection with the granting/pricing of stock options, how to handle these potentially explosive areas before (or after) they detonate, and how to avoid similar problems in the future.
The second article: “Daubert: More Important than You Think in Business Litigation,” looks at the most recent cases involving the admissibility of expert witness testimony in business disputes, especially the testimony of financial experts. To access the August 2007 issue of eSource, click here (and scroll down about halfway to find the article links). For complete news from the ABA Business Law section, including 2007 presentations and materials, click here.