BVWire #51-1

December 6, 2006 | www.BVResources.com | Issue 51-1

Sold-out AICPA conference starts a busy week for BV

This is a big week for the BV profession, beginning with the AICPA conference in Austin (see highlighted box below). We will be covering more of the conference debates and hallway discussions in next week’s issue. But first, the news from the courts and other important BV arenas:

Bankruptcy court disqualifies ‘maverick’ DCF analysis

Just last week a federal bankruptcy court in Delaware (In re Nellson Nutraceutical, Inc.) precluded the valuation report of a qualified expert, primarily because in his discounted cash flow (DCF) analysis, he’d used a measure of EBITDA minus Cap Ex (capital expenditures) to determine terminal value. The court said:

[W]hile EBITDA minus Cap Ex is used as a ‘credit statistic’ to measure, among other things, whether a company can adequately service its debt, it has never before been used by any expert before any court in the United States to determine a company’s terminal value under a DCF analysis.

Therefore, Judge Sontchi found the untested, unprecedented method to be unreliable pursuant to Daubert and its increasing progeny—including the recent In re Med Diversified bankruptcy opinion out of New York (see BVWire #47-4). And similar to that case, the Nutraceutical court had first qualified the expert to testify under the federal rules—and then struck his report after trial—for its use of “maverick” methodology. For a copy of the full-text court opinion, click here.

IASB publishes its version of Fair Value Measurements

Also last week the International Accounting Standards Board (IASB) released its “preliminary views on providing consistency in the measurement of fair value.” Like its FASB counterpart, FSAS 157 (see BVWire #48-3), the IASB discussion paper does not introduce any new fair value measurements, which are scattered throughout existing International Financial Reporting Standards (IFRSs). However, guidance on measuring fair value is not always “consistent” among IFRSs, the IASB says, and it aims to establish a “concise definition” to simplify IFRSs and improve the quality of fair value information in financial reports.

Interestingly, the International Board concedes the advance work that FASB has done to define fair value in accordance with U.S. GAAP. To read more on the discussion paper, click here. Note: The deadline for comments is April 2, 2007.

How will FSAS 157 impact the valuation of intangibles?

The timing couldn’t be better to broadcast “Valuing Intangible Assets of Financial Reporting,” the latest in BVR’s series of “hot topic” telephone conferences. Among other items on the agenda, the panelists—Neal Beaton, Mark Zyla, Ed Ketz, and moderator Jay Fishman—plan to outline FSAS 157 Fair Value Measurements and discuss its impact on the business valuation community generally and valuing intangibles (FSAS 141R and 142) in particular.

The telephone conference airs next week, on December 12, 2006. To register, click here.

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Latest trend: What percent of BV revenues come from BV activities?

Another snapshot from BVR’s soon-to-be-released 2007 Business Valuation Firm Economics & Best Practices Survey: Less than an eighth of CPA revenues come from business appraisals and related work (see table below). The larger CPA firms, often with a single partner running the business valuation “department,” show smaller and smaller percentages of total revenue from BV activities—and this may be a continuing trend, given that many public-firm auditors are growing more wary of performing fair value appraisals.

Per Cent of total billings received from business valuation activities
Small BV firms (<$200k in total billings)	87.3%
Mid-size BV firms ($200k-$1MM in total billings)	88.2%
Large BV firms (>$1MM in total billings)	73.2%
Small CPA firm (<$1MM in total billings) % of revenue from BV activities	16.5%
Mid-size CPA firms ($1MM-5MM in total billings)	14.3%
Large CPA firms (>$5MM in total billings)	5.0%
Other/M&A/Consulting/Investment	21.0%

This is just a small slice of the data that will be available in BVR’s full report; to pre-order your copy, click here.

IRS currently tied with tax-affecting for biggest BV issue

Surprisingly, last week's survey on the biggest BV-related event of 2006 shows that IRS-related issues (appraiser/appraisal penalties, BV guidelines, etc.) are currently running neck-and-neck with S Corp valuations and the long-running debate on tax-affecting. Issues related to fair value for financial reporting and the determination of discounts are tied for second place. And at least one respondent believes that the AICPA’s soon-to-be-issued final exposure draft of its BV Guidelines “may impact practitioners well beyond just those that are CPAs.”

The survey is still ON: We’ll keep the survey running through the holidays, and post the final results in the first BVWire of 2007. It takes just a few seconds; to register your opinion, click here.

Should BV analysts be responsible for 3rd party specialists?

And not so surprisingly, the AICPA’s proposed Statement on Standards for Valuation Services created quite a buzz at the Association’s 2006 National Business Valuation Conference, which just wrapped up yesterday in Austin, Texas. One provision that keeps “cards and letters flowing,” said presenter Ron Seigneur, concerns the use of a third party’s work. In particular, if a valuation analyst hires a specialist (such as a real estate or machinery appraiser) then the proposed Standards require an analyst to evaluate the specialist’s qualifications, including education and experience. Many BV professionals are understandably reluctant to evaluate another professional’s background.

“Some clarification may be in order,” agreed co-presenter W. James Lloyd. The way he reads it: If the specialist’s work is material to the valuation conclusion, then the analyst must perform due diligence, to determine whether the specialist has done an adequate job—and to impress upon clients the need for more than just “drive by” appraisals.

But if analysts routinely disclaim responsibility for auditors’ work or management financials, why must they treat the work of third party experts any differently? “We need your comments, input, and help” on the proposal, Ed Dupke, chair of the Standards task force, told the 900 AICPA attendees. The comment period on the exposure draft ends December 15, 2006, with an effective date planned for mid-2007; see BVWire #50-3, which contains a direct link to the Standards.

E&G returns flagged for audit ‘magically’ withdrawn

Overheard at a recent BV conference in Colorado: At least one estate and gift tax attorney reports that he’s seen audits—previously flagged for an IRS audit—suddenly and “magically” withdrawn. “The word on the street is that this administration is going to try and gut the estate tax by eliminating IRS staff, from the low[est] all the way to the highest level,” he says. “If they minimize audits, then the estate tax will ‘repeal itself.’”

Certainly, reports over the summer that the IRS has cut half of its E&G staff (see BVWire #46-3) seem to support the buzz. But will the recent mid-term elections bring the tax auditors back? Stay tuned…

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