February 28, 2007 | www.BVResources.com | Issue 53-3

Stock option backdating: the costs escalate with new case

Option backdating is “the abuse du jour” in the stock-based compensation area, according to Bob Duffy (Grant Thornton, LLP), who spoke at the recent BV track of the LEI National CLE Conference in Snowmass, Colorado. (See BVWire # 52-2). Backdating occurs when company management intentionally selects a pricing date that precedes the corporate action resulting in the employee stock option grant.

“Like steroids in sports, it became the normal practice to keep up with what other companies were doing,” Duffy says. He estimates a minimum of 160 companies were involved, to the tune of $75 billion. “That’s how much money was given to option holders through backdating.”

The costs could go even higher, given the recent ruling by the Delaware Chancery Court allowing a shareholder derivative suit to proceed against current and former board members of Maxim Integrated Products, Inc. for alleged breach of duty in the backdating context. For a copy of Ryan v. Gifford (February 6, 2007), click here.

IRS offers employers opportunity to provide backdating relief

Company-employers have until today, February 28, 2007, to notify the Internal Revenue Service of their intent to participate in an initiative aimed at providing relief for rank-and-file employees affected by the issuance of backdated and other “mispriced stock options,” according to a recent IRS release.

“This shameful practice was widespread,” says Commissioner Mark Everson. “We are allowing employers to satisfy the tax obligation of employees who did not knowingly participate in these schemes.”

The program permits employers to pay the additional 20% tax, plus interest, that any “unknowing” employee would otherwise owe (under §409A) on a backdated option exercised in 2006. “The initiative does not permit the company to pay the additional tax for stock options exercised by its top executives or other insiders.” For complete details, see IRS Announcement 2007-18.

FASB expands fair value measurement with Statement No. 159

The Financial Accounting Standards Board (FASB) has just released Statement No. 159 The Fair Value Option for Financial Assets and Financial Liabilities, the latest in the Board’s continuing effort to account for fair value reporting of financial instruments.

The new Statement applies to all entities, “including not-for-profit organizations,” says the Board's summary release. It also amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, which applies to all entities with available-for-sale and trading securities. “The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions.”

The Statement is effective as of the beginning of an entity’s first fiscal year after November 15, 2007. The FASB summary is available here; a full-text of Statement No. 159 appears here.

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4th Quarter 2006 Control Premium data have arrived

We’ve just posted the 4th Quarter 2006 update to the Mergerstat® /Shannon Pratt's Control Premium Study™ online at BVMarketData.com, including 172 new transactions and the corresponding summary documents. Overall, the database now contains transaction details on over 5,420 public companies with median revenues of $95 million and a $126 million median selling price. For more information, click here.

The no. 1 question in healthcare valuation: intangible assets

When a not-for-profit hospital purchases a physician medical practice, how should business appraisers calculate the intangible asset values, “incorporating workforce in place, systems, protocols and procedures, patient revenue base, etc.,” to estimate fair market value for the practice, even though on a discounted cash flow basis, the value of the practice is zero?

That “won the award for best question” at BVR’s recent telephone conference on Healthcare Valuation, according to panelist Don Barbo. “It pulls in a lot of hot topics,” including the value of medical records, a “superstar” physician, and even the practice’s telephone number. While the response is always fact-specific, Barbo and moderator Mark Dietrich discussed valuing each item using a cost approach, the theory being to capture the hospital’s replication cost—and the risk that it might be overpaying.

Panelist Carol Carden also discussed the opposing view, focusing on expected returns. “Why would a hypothetical willing buyer pay an amount for charts or workforce or any of those other assets if they’re not able to generate a cash flow off of them?”

For the complete discussion (CD or transcript), including the impact of recent court cases and Medicare updates on healthcare valuations, click here.

IASB extends comment period on fair value measurements

Earlier this month, the International Accounting Standards Board extended the period for public comment on its Discussion Paper Fair Value Measurements (see BVWire #51-1), from April 2, 2007 to May 4, 2007. “Constituents requested more time, given the significance of the issues raised in the discussion paper,” according to the IASB release.

Sources also indicate the International Board may have been cognizant of the need for convergence with FASB’s Statement No. 157 on Fair Value Measurements. For example, the BVWire has obtained comments from the Financial Reporting Committee of the Institute of Management Accountants. Its specific concern:

If the FASB and the IASB take differing views on key concepts (e.g. can one use entity specific information, is fair value an exit price or an entry price, can one record day one gains based on an internal model when applying Level 3 fair value guidance), the accounting profession will be faced with global disharmony which will result in the need for companies to continuously maintain two sets of books (one for US GAAP and another for International GAAP) when preparing statutory financials and foreign filings.

 For more information on the IASB’s invitation to comment and related guidance, click here.

Live from NY: a mock trial for matrimonial valuations

The New York chapter of the ASA is preparing to host the first-ever educational “mock trial” for appraisers in early May. An expert panel of attorneys will take attendees through a matrimonial dispute involving a number of assets; the sessions will include “behind the scenes” trial prep with plaintiff’s and defendant’s counsel, as well as expert testimony and cross-examination.

A special feature: New York State Supreme Court Justice Jacqueline Silvermann will preside over the proceedings, announcing her “decision” at midday with follow-up analysis of the process as well as the expert participants. For more information, click here.

Blame the technology bubble on youth?

New research from the Harvard Business School suggests that youthful investors—as well as more youthful fund managers—may have contributed to the burst of tech stock bubble, from which many economic sectors still haven’t recovered. Comparing the returns of mutual fund managers both before and after the technology stock bubble (1998-2000), the HBS researchers show that fund managers under the age of 35 “exhibited trend-chasing behavior that produced over-investment in tech stocks,” while more mature managers may have heeded the lessons of prior experience, that “past returns do not imply future performance.” For a copy of the article, click here.

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Copyright © 2007 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC

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