FASB issues final FSP FAS 140-3

Ever since the release of FAS 140 in 2000, its concept of the qualifying special-purpose entity (QSPE) raised continuing concerns.  In a meeting of the Financial Accounting Standards Board (FASB) last May, Chair Bob Herz said that QSPEs had become the “poolings of our era,” referring to the prior standards on purchase versus poolings that FAS 141 replaced in 2001, according to an FEI posting.  At the same meeting, Board member George Batavik pointed out that the QSPE model in FAS 140 “has, and will continue to have, application problems…we’ve been working on it for years and just when we think we’ve identified everything, another issue comes up.”

Board members and FASB staff supported researching alternatives to the QSPE, primary among them the “linked presentation” model, which requires balance sheets to display gross amounts of both the financed asset and the financing within a single asset caption (with footnote disclosures).  After more than two years of deliberation, last week the FASB released the final FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions

This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under Statement 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140.

Criteria to permit separate consideration exists “if there is a valid business or economic purpose for the counterparties to enter into two transactions separately, and the repurchase financing does not return control of the previously transferred financial asset to the initial transferor.”   The final FAS 140-3 is here, effective for financial statements issued for fiscal years beginning after November 15, 2008; earlier application is not permitted. 

SEC invites comment on financial statement Progress Report

“The current financial reporting system is characterized by a large volume of standards, including individual standards that are too long or complicated; interpretations; and detailed application guidance from a variety of public and private sources,” says a new, 115-page Progress Report of the SEC Advisory Committee on Improvements to Financial Reporting.  “This volume and complexity have led to concerns about whether the FASB is following appropriate priorities within a consistent conceptual framework in adopting standards, and whether investors, preparers, and auditors can efficiently find the complete body of authoritative literature on an accounting issue.” The Progress Report proposes twelve areas for improvement, including:

  • Rather than address specific industries (e.g., banks), any new accounting standards should address business-specific activities (e.g., lending).  Industry-specific guidance should be eliminated prior to any convergence of U.S. and international standards.
  • GAAP should presume that “formally promulgated alternative accounting policies should not exist.”
  • FASB should solicit representation by experienced investors, large and small.
  • The Financial Accounting Foundation should develop performance metrics to assess the FASB’s adherence to its mission statement, including adding an amendment to emphasize avoiding complexity.  The FASB should also form a constituent-based Agenda Advisory Group to further improve its standards-setting process and timeliness.
  • The FASB should remain the sole standard setter in accounting while the SEC should issue broadly interpretative guidance in “limited situations.”

Last week the SEC posted a Request for Comments, due thirty days after the Progress Report is published in the Federal Register—presumably on or before March 14, 2008.

PCAOB discussion.  Today, February 27, 2008, a Public Company Accounting Oversight Board (PCAOB) panel will meet to discuss the Progress Report and its proposals.  The PCAOB briefing paper is here.

Handling compliance (409a, 141R) with relative ease

“With the implementation of 409a over the past several years, we have seen and heard it all,” says a recent blog from Quist Valuation (Broomfield, CO).  “Frustrated, mad and confused executives, auditor/client disagreements, auditor/valuation firm disagreements…”  However, there are numerous companies that handle 409a compliance with ease, “minimal time and minimal stress.”  These companies take a proactive approach and elect to do multiple valuations per year.  “They set budgets and expectations, keep open communications with their auditors and valuation firms, and adhere to a consistent timeline.”  To read more, click here.

Get ready for 141R:  Analysts at Mercer Capital (Memphis, TN) have just posted a comprehensive overview of 141R compliance.  Financial managers should familiarize themselves with the rule changes now, the article says, to be adequately prepared when FAS 141R becomes effective.  “The revised standard sharpens the accounting guidance for business combinations as well as the scope of situations applicable to these rules, and also provides a significantly larger body of implementation guidance than its predecessor.”   The complete article is here.

New application for Butler/Pinkerton Model: 123R

“While working on a recent engagement to value employee stock options to comply with FAS 123R reporting requirements, we uncovered yet another use for the Total Cost of Equity and Public Company-Specific Risk Calculator (BPM),” write co-developers Pete Butler and Keith Pinkerton in their article in the current (March 2008) Business Valuation Update™.  This article is also available at BVMarketData as a free download. 

FAS 123R permits nonpublic entities to “exercise judgment” in estimating expected volatilities—including basing these estimates on the average volatilities of comparable public entities.  But by using the BPM, analysts can avoid this subjective exercise.  “You can look at your specific private company and determine its implicit volatility using its total cost of equity (TCOE).”

Listen to the podcast: Butler and Pinkerton will discuss this new application of the BPM and more in the next BVR teleconference on March 6, 2008.  Attendees will learn financial support for the model, how to select inputs and read outputs; and they’ll be able to pose specific questions to the developers.  An extra bonus: Attendees will receive five days of free access to the calculator, and current BPM subscribers can register for the conference at a discount.  To learn more, listen to the authors’ “live” podcast at BVResources.  To attend the conference, click here.

Current 2008 deal data: ‘as bad as you’d expect’

Last week Thomson Financial posted year-to-date leveraged buyout numbers, “and they’re as bad as you’d expect,” according to PE Week Wire (Feb. 21, 2008).  So far this year, the global market has seen barely over a hundred LBOs, for a total value of $7.8 billion.  That’s 73.2% off from the $29.1 billion worth of LBOs this time last year.  “The numbers get slightly better if you look at M&A activity by LBO-backed portfolio companies,” PE Wire adds, “but not by much.”  Current figures for YTD 2008 deals stand at $14.6 billion, off nearly 70% from the $47.9 billion done at this time last year.

The decline in leveraged buyouts is slashing fees for investment banks, according to a recent Bloomberg report.  “Buyout firms paid $5.4 billion to securities firms in the U.S. and Europe in the second half of 2007,” 38% less than the first six months.  The pace of announced buyouts also slumped in the second half of 2007, with PE firms announcing $202 billion of deals worldwide, about 66% less than in the record first six months, Bloomberg data show.  In 2008, PE firms have so far announced $3.5 billion of deals.

ASA requests nominations for BV Committee

The Nominating Committee for the American Society of Appraisers’ BV Committee is beginning its selection process for this year’s elections.  There are several slots open—“so we need as many qualified candidates as possible,” says ASA BV Committee Chair, Terry Allen.  Nominees must be in good standing with the ASA (or FASA) designation and meet additional continuing education requirements.  Although not required, some history of service to the BV profession is preferred—either within the ASA or other professional societies and organizations.  To nominate candidates for the ASA BV Committee (including self-nominations), contact Allen at tallen@fvginternational.com.

The BV Committee is comprised entirely of volunteers who meet twice a year in conjunction with the ASA International Conference and the ASA BV Conference; it oversees the education, standards, and accreditation of ASA professionals.  Among its efforts this year to improve and expand educational offerings, the BV Committee co-sponsored the sold-out Fair Value Summit with BVResources in New York City (the second annual summit will have more room).  Later this year, the co-sponsors will hold “Divorce: A Hands-On Workshop for BV Practitioners” in Chicago, September 16-17, 2008. For more information, click here.

IVSC appoints interim board of trustees

The International Valuation Standards Committee (IVSC) has just announced members to its interim board of trustees, which will oversee the restructuring of the IVSC that began last year.  (See BVWire™ #55-4.)  Among the seven new appointees: Roel C. Campos, former commissioner of the SEC (2000-2007) and Joseph J. Vella, immediate past Chair of the IVSC.  For the full roster, click here.

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