Should SEC permit U.S. issuers to comply with IFRS?

The Securities Exchange Commission has just issued Release No. 33-8831, Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (IFRS).  The Commission is publishing the Concept Paper to obtain “information about the extent and nature of the public’s interest” in allowing U.S. issuers to prepare financial statements in accordance with IFRS (published by the International Accounting Standards Board) for purposes of complying with SEC rules and regulations.  At present, U.S. issuers prepare their financial statements in accordance with U.S. GAAP (generally accepted accounting principles), as regulated by the Financial Accounting Standards Board. 

A copy of the Concept Release is available here.  There are also instructions on how to submit comments, and links to review comments as they come in.  All submissions will be made public and are due by November 13, 2007.

Compliance by U.S. issuers to IFRS requires ‘leap of faith’

Interestingly, the SEC has already posted one lengthy comment. In a letter dated August 10, 2007, Professor Lawrence Cunningham (George Washington University Law School) responds to Concept Release No. 33-8831 in his three capacities: “as a private investor with a sizeable portfolio and skepticism about efficient market theory…; an active scholar interested in the role of accounting information in capital markets…; and as a university professor who has taught accounting to law students for 15 years and written two books on accounting for law school instruction…”  (He’s also authored How to Think like Benjamin Graham and Invest like Warren Buffett (McGraw-Hill, 2002)).

In answer to whether the SEC should permit U.S. issuers to prepare financial statements in accordance with IFRS (and the underlying presumption of comparability between U.S. enterprises and foreign competitors): “It would amount to a leap of faith,” Cunningham says.

The unstated but possibly serious price would be a false sense of global comparability from a veneer of nominal uniformity—uniformity in written standards could disguise considerable diversity in actual practice.

For more of Professor Cunningham’s comments, including the potential conflict between IASB and FASB “standard-setting powers,” click here.

Maine sidesteps classification of professional goodwill

All but four U.S. state court jurisdictions (Kansas, Mississippi, South Carolina, and Tennessee) hold that the goodwill of a professional practice is marital property in divorce cases.  The majority of these (28 states) distinguish between enterprise goodwill (transferable) and personal goodwill (non-transferable/non-divisible).  Three states have yet to issue a holding—Alabama, Georgia, and Maine, and the latter just missed an opportunity to decide between the majority/minority rules on classifying professional goodwill.  Instead, in Hess v. Hess (decided July 5, 2007), the Supreme Judicial Court of Maine deferred to the discretion of the trial court, which had included unclassified goodwill in the expert valuation and disposition of an investment firm.

For a copy of the case abstract of, click here.  The abstract will appear in the next issue of the Business Valuation Update™, and the full-text of the court’s opinion is already available for subscribers of BVLaw.

Free “Goodwill Hunting” download:  We’ve just updated BVR’s state-by-state summary of goodwill decisions, with citations to the lead case in each jurisdiction—including Hess.  Go to BVR’s free download page and click on “Goodwill Hunting in Divorce.”

‘Inflated’ VC valuations will all work out

In response to last week’s item on “inflated” venture capital valuations (BVWire™ # 59-2), Neil Beaton (Grant Thornton LLP) suggests that PE Week Wire™ editor Dan Primack take another look at the bigger picture of VC investment and returns.  “He is looking at ‘historical vintage returns’ over a very short period of time,” Beaton says.  “As we all know (and you’ll recall some quotes from the Delaware bench about misusing short term returns in valuing long-term assets), short term returns are volatile, and even more so in VC funds.  

“The important thing to remember here is that VCs are continuing to invest in NEW ventures; the old ones are just that, old.  Opportunities, like cash flow, are forward looking, so a lot of 409A work is still coming down the pipeline as new funds get invested and funded companies get additional capital to continue.  The ‘inflated valuations’ referred to by Primack exist in many funds and they have a way of working themselves out.  At any rate,” Beaton concludes, “I haven’t seen any slowing of investments and don’t see any slowing on the horizon for now.  There are still LOTS of opportunity.”

Note: In a follow-up to his own item, Dan Primack reports that new data (from PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial) show “the highest number of VC financings since Q3 2001, with nearly 977 deals. The actual number of dollars invested was down slightly from Q1—$7.13 billion compared to $7.43 billion—but it still topped any other quarterly tally from between 2002 and 2006.”

Early bird pricing still available for ASA BV confab 

Don’t miss this all-star line-up of speakers and sessions at this year’s 26th annual ASA Advanced Business Valuation Conference in San Diego, October 28-31: Shannon Pratt and Jay Fishman will start off with an inaugural “state of BV” address.  Pratt will then present cost of capital updates with Roger Grabowksi, while Fishman will tell attendees “how to stay out of trouble” with the IRS.  Bruce Bingham will cover financial reporting for BV analysts, and Pete Butler and Professor Richard Sias will discuss their latest refinements to quantifying company-specific risk.  Neil Beaton clarifies the “perplexing” aspects of 409A and 123R implementation, and Dennis Webb discusses an advanced model for holding company valuations, incorporating present value, put option, short-term liquidating partnerships, restricted stock studies and other proxies.  Also front and center on the agenda is “SFAS 157 and 159 and Beyond: Fair Value, the Fair Value Option, and the Future of Fair Value in Financial Accounting.”

For more information, visit the conference website; register by September 14, 2007 and save $75.00.  Firm discounts are also available.

IVSC to join FASB valuation group

At the FASB’s behest, the International Valuation Standards Committee (IVSC) is to be a member of the Board’s new Valuation Resource Group.  (For more on the Group’s formation, see BVWire #57-4.)  So far, the IVSC is the only non-U.S. organization on the FASB group, and will be represented by Chris Thorne, the current Vice Chair of the IVSC Standards Board.  “As the main focus will be valuation issues arising under the U.S. standards, it is natural that the group is made up of American practitioners, Thorne says. However, FASB is keen for the group to have input from an international perspective to avoid convergence problems suffered in recent years by FASB and IASB in bringing their respective accounting standards together.”   To learn more, go to the IVSC website and look for the IVSC E-News, Issue 17.

PCAOB comment period closing soon

This summer the Public Company Accounting Oversight Board (PCAOB) has floated two important proposals for public comment: an amendment to Rule 3523, “Tax Services for Persons in Financial Reporting Oversight Rules,” and proposed Rule 3526, “Communication with Audit Committees Concerning Independence.”  Both comment periods are due to expire September 7, 2007.  For more information, click here

Appraisal Foundation extends deadlines for applications

The Appraisal Foundation is in the midst of its annual search for qualified candidates to serve on one of its three Boards (see BVWire # 57-3 ), and has extended its deadline for applications by two weeks, or until August 31, 2007.  For more information, check out the Foundation website or email Anne Raley.

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