January 24, 2007 | www.BVResources.com | Issue 52-4

IVSC proposes new International Valuation Standards Board

Acting on its promise made last fall, the International Valuation Standards Committee (IVSC) has just released its “radical proposals” for restructuring. In a January 18, 2007 release, the IVSC compares this “major” restructuring proposal to the one “undertaken by the International Accounting Standards Board in the late 1990’s that led to the creation of the…IASB.” Key recommendations include:

• Creation of a new, independent and autonomous International Valuation Standards Board, with an Elected Board of Trustees and an Interpretations Committee;

• Renaming the IVSC to the “International Valuations Standards Council,” and expanding its membership “beyond national professional valuation institutes to include valuation companies, national standard setters, users of valuations, academics and others;” and,

• Developing “high quality” international practice standards and assisting the development of the valuation profession in emerging economies.

The IVSC may also be acting in concert with FASB’s Invitation to Comment on domestic (U.S.) valuation standards, released last week. (See BVWire™ 52-3.) In another announcement (Jan 15, 2007), IVSC chairman Joseph Vella welcomed the FASB initiative as well as the opportunity to create “one set of consistently applied global standards…I call on all involved to lay aside self interest and work together to improve the quality and transparency of valuation reporting.”

Comments to the proposal are due by March 9, 2007, in advance of a special April meeting; the IVCS is currently targeting an effective date of January 2008. To review the full proposal and related releases, visit www.ivsc.org.

Will there be licensing standards for M&A broker-dealers?

At last week’s 2007 winter conference of Alliance of Merger and Acquisition Advisors (AM&AA) in Las Vegas, the “hot topic in the hallways” concerned efforts by the American Bar Association (ABA) and the SEC to regulate licensure/registration for M&A advisors in the mid-marketplace. In an update to attendees, the Alliance’s Licensure Task Force announced the “urgent need to clarify and, if possible, simplify this situation for the greater benefit of members.”

In other words, “now that the SEC has determined to enact new regulation/enforcement in this area,” say AM&AA presenters, “it's time to get out in front of this train and attempt to switch it on to the best possible track.”

To this end, the Alliance “fully supports” two related initiatives: (1) the adoption of a new class of Private Placement Broker (PPB), as recommended by the ABA task force; and (2) the creation and adoption of a limited exemption from registration as a full broker/dealer or PPB, if certain lengthy conditions are met—including simplified registration and role in the sale.

To support the costly effort, the AM&AA is soliciting contributions, appealing to the profession’s desire to preserve legitimacy. “As the legal community becomes more aware of how securities law applies, there will be more adverse impact on unlicensed intermediaries as more and more attorneys [guide their clients] to use only a properly licensed intermediary.” For the Alliance’s complete statement and presentation, click here.

Five factors the IRS relies on in reasonable comp. cases

Last week we heard from IRS Engineering Manager Robin Ruegg (Bloomington, IN) regarding her opinions on compensation data sources and surveys; this week, she points us to the “five factors” used in Elliots v. Commissioner, which (in her opinion) the IRS “often uses” to develop its reasonable compensation cases. For a copy of this landmark 1983 case—just one of over 1,600 federal and state, valuation-specific decisions available to subscribers of the BVLaw™ database at BVLibrary.com, click here.

Sources for industry sector volatility/stock option valuations

“Is there a source of industry sector volatility statistics that would be appropriate for stock option valuations?” asks Plante & Moran subscriber Mark Blazevic, CPA/ABV, CFA (Southfield, MI) last week. We sent his query to BVR expert contributors and professors Ashok Abbott (West Virginia University) and Aswath Damodaran (NYU), who responded as follows:

“I have the industry average equity and firm variances under the ‘Updated Data’ link on my website,” writes Professor Damodaran, “I use them for option pricing all the time.”

“Historical and implied volatility data are available from the Chicago exchanges (CBOE) for the frequently-traded options,” adds Professor Abbott. “If sector-specific volatilities are desired, there are two possible approaches: (1) create a volatility index for a portfolio of options for stocks belonging to that sector (equally weighted/value weighted); or (2) estimate a regression equation for the implied volatility for the stocks in the desired sector.

Do you have a valuation question for our BVR experts? Email the editor, and we’ll do our best to find your answer.

EOU subscribers now have access to its archives

In answer to frequent requests from Economic Outlook Update™ subscribers, we’ve now made all past issues of the EOU (beginning with the 1st Quarter 2003) available with a current subscription.

Why is historical economic information so critical? In the February issue of the Business Valuation Update™, Carole Gailor, Esq. (www.gailorwallishunt.com) points out industry analysis from other online providers doesn’t provide historical profiles, “so that it is difficult if not impossible to find an industry profile that reflects the chosen industry at the valuation date (or during a period reasonably proximate to the valuation date).”

In a recent case, Gailor deconstructed the opposing expert’s valuation report—and devastated the party’s case—by pointing out the absence of industry data at or close to the relevant valuation date, which violated “a central, methodological tenet of business valuation,” that any data reflecting conditions after the valuation date are not relevant.

Her article, “The Ethical Conundrum of Attribution: Plagiarism in Valuation Reports,” also identifies the appropriate citation and use of EOU data; her article is so important, we’ve posted it to the EOU site, along with information on its new archive feature, discounted group subscriptions, and more.

A top source for ‘real options’ valuations

And following up on our discussion of valuation sources for early-stage companies (see BVWire #52-2), we asked frequent expert contributor Neil Beaton (Grant Thornton, LLP) his opinion on the Real Options Group (www.rogroup.com), and their software Strategic Real Options Valuation™, which purports “to go beyond a standard Discounted Cash Flow (DCF) analysis by identifying, modeling and valuing the embedded strategic options, giving managers a deeper insight into their company's true worth.”

“This group is the top of the heap,” Beaton replies. “Trigeorgis literally wrote the book on real options,” he adds, citing ROG’s founder and president, Lenos Trigeorgis, Ph.D. “If I needed someone to turn to, it would be these folks.”

First-ever research fund for private entity valuations

The 85-member Financial Consulting Group has just announced its agreement with the University of South Florida (USF) School of Accountancy to fund the Private Entities Endowed Research Fund (PEERF). The new fund—the only one of its kind at any academic institution—will focus entirely on private entity research, in part to provide the BV community with “authoritative, academically-based research to support…valuation engagements and activities,” reports Michael Mard (Financial Valuation Group) in the current issue of Financial Valuation Litigation Expert.

In particular, the fund will encourage empirical research on private entities in three areas: (1) value drivers—including the all-important discounts and rates of return; (2) enterprise components (intangible and tangible assets); and (3) tax, regulation and reporting requirements. PEERF is looking to raise $300,000; sponsors will receive ongoing research updates and access to publish the completed research. Contributions should go to the FCG at 900 Wilshire Blvd., Los Angeles CA 90017; attention: PEERF.

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