BVWire Issue #173-2 | February 8, 2017

Ripple effect of new, simpler goodwill impairment rule

Public and private companies alike will soon be using a streamlined process for testing for goodwill impairment. The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update 2017-04, Intangibles—Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (ASU 2017-04). The ASU establishes a one-step process for testing goodwill for a drop in value.

The new rules call for a goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. It eliminates Step 2 that requires the impairment to be measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s carrying amount.

Impact: In 2014, the FASB allowed private companies to use a simplified impairment model, and that move triggered the current action for public companies. Although the goodwill alternative was designed to cut the cost of compliance for private firms, it was believed that some would not elect to adopt it. That’s because, if they were acquired by a public company, they would have to undo the election and restate financial statements. This would mean little impact on valuation analysts. Now that public companies will use the same model, the restatement issue disappears, clearing the way for private-company adoption—and potentially more of a valuation impact.

The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers in 2020. Other public-business entities will have an additional year. All other entities that have not elected the private-company goodwill alternative are required to adopt in 2022. Special transition guidance is provided for private companies that have elected the private-company goodwill alternative. Early adoption is permitted for any impairment tests performed after Jan. 1, 2017.

The full text of the ASU is available here.

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Federal Circuit rejects ‘pseudo’ lost profits argument

How much attention, if any, may a damages expert pay to the patent holder’s profit margin when calculating a reasonable royalty before the analysis becomes a lost profits calculation in disguise? The Federal Circuit recently answered this question in an infringement case centering on two patents covering a cooling system for computer processing units. The plaintiff’s damages expert calculated a reasonable royalty using the Georgia-Pacific framework. In constructing a hypothetical negotiation to determine what kind of agreement the parties would have entered into just before infringement began, the expert took account of the plaintiff’s profit on its cooling units under a licensing agreement with a third party.

Post-trial, the defendants unsuccessfully challenged the royalty award, claiming the expert had performed a “pseudo” lost profits analysis. Integrating profits into the reasonable royalty calculation enabled the expert to circumvent the “but for” requirement applicable to lost profits damages, they claimed.

No ‘predominance’ principle: In their later appeal with the Federal Circuit, the defendants conceded “that profits may be considered as a factor in the reasonable royalty calculation.” However, they said, here the profit factor “predominated and virtually subsumed [the plaintiff’s] entire damages case.” They added that the expert’s type of analysis would make lost profits damages no longer worth pursuing by patent owners.

The Federal Circuit said the defendants failed to show there was a “legal principle about predominance that would somehow bar a damages analysis that takes reasonable account of all the evidence relevant to a hypothetical negotiation.” This was all the plaintiff’s expert had done.

The Federal Circuit found “obvious reasons” why some patent holders would seek lost profits. A reasonable royalty analysis has to consider the interests of both sides of the negotiation table, whereas a lost profits analysis has a singular focus: to make the patent holder whole. There is no discounting for the rational interests of the infringer. Therefore, a lost profits award can be higher, the Federal Circuit pointed out.

Here, there was no evidence that the royalty determination was based on an improper methodology, the court concluded.

The case is Danmark v. CMI USA, Inc., 2016 U.S. App. LEXIS 21672 (Dec. 6, 2016). A digest of the decision and the court’s opinion will be available at BVLaw soon.

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D&P reaffirms ERP, lowers normalized risk-free rate

Fluctuations in global economic and financial conditions warrant periodic reassessments of the selected equity risk premium (ERP) and accompanying risk-free rate. Based on current market conditions, Duff & Phelps has reaffirmed its U.S. ERP recommendation of 5.5% to be used in conjunction with a normalized risk-free rate. However, based on declining real interest rates and long-term growth estimates for the U.S. economy, D&P is lowering the U.S. normalized risk-free rate from 4.0% to 3.5%. This lower rate should be used when developing discount rates as of Nov. 15, 2016, and thereafter, until further guidance is issued, D&P says. Using the lower rate, the “base U.S. cost of equity capital” is 9.0% (5.5% + 3.5%).

A normalized risk-free rate is based upon a long-term average rate, and it is used when it is believed that the risk-free rate is abnormally low. This is an “ex post” approach (historical information) and D&P explains the rationale for using normalized risk-free rates in its 2017 Valuation Handbook - U.S. Guide to Cost of Capital. On the other hand, some experts are proponents of an “ex ante” approach, which uses forward-looking estimates that are extracted by examining stock prices today and expected cash flows in the future.

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Busy time for law firm M&A means appraisal ops

It was another busy year in 2016 for law firm M&As, according to a release from Altman Weil, which tracks this activity. Eighty-five law firm combinations were announced in the U.S. in 2016, maintaining its pace since 2013, when U.S. law firm M&A activity dramatically accelerated coming out of the recession. Most combinations last year did not involve large firms—84% were acquisitions of small law firms with 20 lawyers or fewer.

Valuation tip: There are certain nuances involved in valuing a law firm. For example, one special consideration you need to ask about is the “origination credit” aspect of compensation plans. Origination credits are given to staff for bringing a client into the firm. There may be a formula that gives the originator a percentage of billed fees right off the top. This system works great for some firms, but other firms have trouble trying to figure out who originated what. When doing your initial interviews or requests for information, ask whether origination credits are used and what formula is used. Also ask how the plan is working out.

For more information, see What It's Worth: Law Firm Value, which provides key industry trends and data to help benchmark the value of a law firm.

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Guardian arms its advisers with online BV tool

Guardian Life Insurance has signed a strategic agreement with BizEquity to provide its cloud-based business valuation tool to the financial services giant’s thousands of advisers. Guardian intends to use the tool to help them advise small-business owners, according to a company statement.

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Fair value workshop in New York City doubles as CEIV education

The launch of the new Certified in Entity and Intangibles Valuation (CEIV) credential has thrust the issue of fair value into the spotlight. Mark Zyla (Acuitas Inc.) and Nathan DiNatale (SC&H Group LLC) will be conducting the AICPA Fair Value Measurements Workshop, a three-day event, on March 22-24 in New York City. Topics include the latest in best practices in valuation of intangible assets, fair value of contingent consideration, how to test various assets for impairment, fair value in private companies, and an update on the SEC and PCAOB and their views on fair value in public companies.

Bonus: Attending the workshop will also satisfy the education requirement for the new CEIV credential. For more details and to register, click here.

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Global BV News
Groundbreaking damages award issued in China

The Beijing Intellectual Property Court issued its highest damages award ever ($7.5 million) in a case involving Hengbao Co. Ltd. infringing a patent for a USB key owned by Beijing Watchdata Data Systems Co. Ltd. The court calculated lost profits by multiplying the total sales quantity of the infringing products by the profit per unit. Two significant takeaways: (1) the court made it easier for the plaintiff to get crucial evidence from the defendant (there is no discovery procedure in China); and (2) the court award included attorneys’ fees. While the award was the highest ever from this specialized court, it was the third highest such award in all of China. A good discussion of the case is here.

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Global BV on ‘eve of unification,’ says CICBV prexy

“There are tremendous opportunities for the valuation profession in the next few years,” says Mary Jane Andrews, president and CEO of the Canadian Institute of Chartered Business Valuators (CICBV).I believe that we are on the eve of unification in international standards and professional valuer competence as we converge to a global valuation profession.” Andrews made her remarks in an interview with Nick Talbot, CEO of the International Valuations Standards Council (IVSC). She hopes that a global valuation credential will be developed “that symbolizes uniform high standards that would reasonably be expected by users of valuation services.” You can read the full interview here.

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BV movers . . .

People: Andrew Lines has been appointed principal in CohnReznick Advisory’s Chicago office … Lee Fields is now partner-in-charge of advisory services at Aprio in Atlanta … Brown Schultz Sheridan & Fritz announced the promotion of Adriann Reed to senior manager in its Camp Hill, Pa., office.

Firms: Dixon Hughes Goodman’s healthcare practice, DHG Healthcare, has expanded in Nashville, Tenn., with the acquisition of HDR Consulting, a healthcare consulting firm … Atlanta-based Frazier & Deeter rejoined PFK International’s global network … Haskell & White, of Irvine, Calif., updated its logo and added new features to its website at … Omaha, Neb.-based Lutz will add accounting firm McDermott & Miller and three of its offices on May 1 … Marks Paneth has acquired Shedler & Cohen, both based in New York City … Mauldin & Jenkins, headquartered in Atlanta, has joined PrimeGlobal as a member firm … Morones Analytics of Portland, Ore., has redesigned and updated its website at Baton Rouge, La.-based Postlethwaite & Netterville has redesigned its logo and website at as part of a new brand identity … Dallas-based Ryan was named one of the best workplaces in Texas by Fortune magazine and Great Place to Work … MRZ CPAs of Houston announced the launch of SKY Valuation, a practice offering valuation, forensic accounting, and litigation support services. SKY Valuation is headquartered in MRZ's Spring, Texas, office and will work throughout Texas … Chicago’s Stout Risius Ross announced that it has reached an agreement in principle to purchase Irvine, Calif.’s FMV Opinions. Both firms anticipate the deal closing by the end of the month … Wipfli has added Chicago-based Horwich Coleman Levin, the Milwaukee-based firm’s fourth Chicago area acquisition in the last 13 months.

Please send your professional and firm news to us at

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CPE events

How Repurchase Obligations Impact Valuation (February 9), with Chuck Coyne (Empire Valuation Consultants), Tabitha Croscut (Steiker, Greenapple & Croscut), and Joseph Marx (Principal).

Promoting Quality in Providing Fair Value Measurements for Financial Reporting (February 22), with Anthony Aaron (University of California).

Social Media: Who Owns It and What Is It Worth? (February 23), with Mark Zyla (Acuitas).

Valuing Banks: Day 1 Fundamentals (February 28), with Keith Sellers (University of Denver). Part 2 of BVR's Special Series on Banking and Financial Services.

Valuing Banks: Day 2 Case Study (March 1), with Keith Sellers (University of Denver). Part 3 of BVR's Special Series on Banking and Financial Services.

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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New and trending LinkedIn discussions

Why Are Site Visits and Management Interviews Important in Business Valuation?

Robots, Schmobots

Answers to Eugene Fama's testament (disenchanted?) about 60 years of research in finance

Your discussion could be featured here—BVR's LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you're not already a member, request to join:

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

FASB KOs Step 2

Lost profits case

D&P lowers rate

Law firm M&A

BizEquity deal


Global BV news

BV movers . . .

CPE events

LinkedIn discussions



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