IASB completes phase two of Business Combinations

Last week the International Accounting Standards Board (IASB) completed the second phase of its joint business combinations project with the FASB by releasing a revised version of IFRS 3 Business Combinations and an amended version of IAS 27 Consolidated and Separate Financial Statements.  The new requirements will take effect July 1, 2009, although “entities are permitted to adopt them earlier,” according to an IASB release.   “Now the accounting requirements in IFRSs and U.S. GAAP will be substantially the same, thanks largely to the changes that the FASB has made to U.S. GAAP,” says IASB Chair Sir David Tweedle.  “The changes to IFRSs have, in contrast, been relatively small.”   Next the IASB plans to publish a Project Summary and solicit feedback on the new requirements.  More information, including subscriptions to electronic IFRSs are offered at the IASB website.   

Also available: “Business Combinations II: Enhancements to Accounting for Global M&A” appears in the latest issue of INSIGHT, the IASB’s quarterly journal.  The Q4 edition focuses on “issues related to worldwide adoption of IFRSs,” including a view of the European Union two years after the adoption of IFRSs and a discussion of the SEC removing reconciliation requirements for IFRSs in the U.S.  Download a copy here.

Two IFRIC vacancies.  Trustees of the IASB are looking to fill two vacancies on the International Accounting Standards Committee (IASC).  “In making these appointments, the Trustees will place special emphasis on a candidate’s ability to identify and address issues concerning the practical application of IFRSs.”  Once appointed, members will serve terms through June 30, 2011, and will typically attend six two-day meetings per year in London. Candidates should send a cover letter and a CV by February 7, 2008.  Learn more—and download an application—here.

Daubert challenges up by 200%

The U.S. Supreme Court’s Kumho Tire decision in 1999 extended the Daubert admissibility criteria to non-scientific expert testimony—and since then, Daubert challenges to all types of expert witnesses have increased almost 200%, according to the latest annual study by PricewaterhouseCoopers (PwC).  The 2000-2006 Financial Expert Witness Daubert Challenge Study examines nearly 3,000 federal and state court opinions and finds the following trends:

  • The number of Daubert challenges to all expert witnesses increased by more than one third between 2005 and 2006—the second consecutive annual increase exceeding 30%.
  • Despite increases in the number of challenges—and exclusions—in the past seven years, the percentage of expert exclusions is remaining fairly consistent, at around 47%.
  • Approximately 519 Daubert challenges targeted financial experts; of these, 106 took place in 2006—an increase of 14% over 2005.
  • Of the 519 challenges to financial experts, 30% were completely excluded, 18% were partially excluded, and 49% were admitted.
  • Five federal circuits (2nd, 3rd, 5th, 6th, and 7th) together heard 60% of all financial expert challenges.  In the 9th Circuit, 68% of expert testimony was excluded in whole or in part, compared to only 24% in the 1st Circuit.
  • Although plaintiffs’ experts are the most frequent targets, once defendants’ experts are challenged, exclusions are in equal proportion (47% plaintiffs vs. 48% defendants).
  • Economists, accountants, and statisticians comprise 50% of all challenges—but they also survive Daubert attacks more successfully than other financial experts.

Notably, “lack of reliability has been the leading cause of a financial expert’s exclusion, followed by lack of relevance and lack of qualifications,” the study says.  In addition, “methodological flaws caused by the misuse of accepted financial/economic methods are a frequent cause of financial expert exclusion.”  Less common was a “maverick” use of novel or untested methods.  Failure to consider a discounted cash flow (DCF) analysis was the basis for expert exclusion in three BV cases, most recently in In re Med Diversified bankruptcy (2005) and Celebrity Cruise Inc. v. Essef Corp. (2006).   

2007 study due soon.  The 2006 study is currently available as a free download at PwC.  The 2007 annual update is slated for formal publication in March 2008, and we’ll keep you posted on its availability. 

One of the best BV websites

Thanks to Nancy Fannon for bringing the annual PwC Daubert study to our attention at the recent National LEI/CLE Conference in Vail, Colorado (see last week’s BVWire™).  Of special note: Fannon has just posted her presentation slides from the conference—on lost profits/economic damages and valuation discounts (in the context of Chapter 14 and Section 2036 cases) at her website, which was recently updated and enhanced.  Check out the expanded offerings and new information available at www.fannonval.com, which BVFLS attendees agreed was already one of the best in the business.

Correction: In last week’s item on the LEI/CLE conference, the litigation which lasted two and a half years for Tom Hilton and his firm (Anders Minkler & Diehl LLP, St. Louis) culminated in a trial that took sixteen weeks (not days).  In his presentation on e-discovery, Hilton also mentioned that instead of hearing “what information do you need to form your opinions?” he’s dreading the day when attorneys ask, “where is it possible to find the information you need?’”  As a starting point, try this article by Micheal LoGiudice, CPA/ABV (PwC Chicago), “A Financial Expert’s View on e-Discovery and Financial Expert Challenges,” originally published in e-Discovery Law & Strategy (ALM), available here.  

Frazier appointed to IRS advisory committee

The Internal Revenue Service just announced twenty new appointments to its Information Reporting Program Advisory Committee (IRPAC), which “provides an organized public forum for discussing relevant tax administration issues between IRS officials and representatives of the public,” according to a news release.  Among the new members: Will Frazier, senior managing director and principal of Howard Frazier Barker Elliott, Inc. (Houston).  CPAs comprise nearly half of the appointments, followed by attorneys.  All will join the fourteen returning committee members in 2008.  For more information on IRPAC, visit the IRS Tax Professionals page.

By the way: Don’t miss Frazier along with John Porter (Baker Botts) and Michael Paschall (Banister Financial), as they discuss the Jelke reversal in the first BVR telephone conference of 2008.  As many will recall, Frazier was the business appraiser in the original Tax Court case, while attorney Porter led the appeal to the 11th Circuit, which reversed the decision and ratified dollar-for-dollar reduction in embedded capital gains.  To register for the teleconference—which takes place tomorrow, January 17, 2008—click here.

Why two appraisal standards/qualifications boards?

In answer to last week’s question on what urgency, if any, business appraisers may feel toward participation in The Appraisal Foundation’s administration of USPAP, Keith Reynolds, ASA, writes, “Can anyone tell me why we need TWO different Boards: the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB)?  It would seem to me (and possibly the average person) that ‘standards’ and ‘qualification’ are two sides of the same coin.  Call me crazy,” Reynolds says, “but wouldn't we be able to save a lot of money (and resources) if both functions could be combined under the same organization?  Just a thought... “

Email your thoughts—crazy or just questioning—to the editor.

409A could be going global

“Recently we became aware of an issue in India that makes us think 409A is potentially going global,” writes Bo Brustkern, principal Arcstone Partners (Denver, Colorado) at a recent posting on his blog.  “The Fringe Benefit Tax (or FBT) has hit the books,” Brustkern reports, “and it looks somewhat familiar.”   Any company that compensates its employees in India with stock options must file quarterly reports and pay a tax on the intrinsic value of an option as it vests.  “In addition, the valuation must now be performed by a Category 1 Merchant Banker registered with the Security and Exchange Board of India.”  Arcstone Partners—another bang-up BV website, with a current reach to appraisers, attorneys, acquisition specialists, and others—will post updates as they learn more.  In the meantime, check out www.arcstonepartners.com.

ASA taking BV to China’s growing appraisal population

More evidence that this could be the “International Age” of BV:  Bill Quackenbush (Advent Valuation Advisors LLC) and Paul Bauman (Tampa, FL) just returned from Beijing, where they taught two ASA principles of business valuation courses to members of the Chinese Appraisal Society (CAS).   Established in 1993, the CAS is a quasi-governmental agency that licenses appraisers and now boasts more than 30,000 members.  In 1995 it joined the International Valuation Standards Committee and in 2005 it joined the World Association of Valuation.  Currently, CAS “has established close ties with more than twenty countries and regional associations of the appraisal profession,” according to its English version website.

The CAS has grown alongside increasing foreign investment in China, Quackenbush says.  “Apparently, the value of foreign investment must be ‘substantiated’ by an appraisal performed by a Chinese-licensed appraiser, and the transaction price must closely coincide with the appraisal.  Foreign investors would be well-served to have their own appraiser oversee the process,” he adds, “someone who understands the unique issues.”  For example, Chinese citizens are restricted in placing foreign investments, so the Chinese stock markets are considered “over-invested and over-priced.  That obviously can affect value,” Quackenbush observes, “much the same way the ‘dotcom’ boom here affected technology company values a decade ago.” 

Another example: the Shanghai Composite Index was up 97% in 2007, even after falling 14% from an October high.  And though China’s GDP saw a 12% growth in 2007, The Economist predicts an “easing” of growth to 10% in 2008 and 9.3% in 2009.  One valuation firm that plans to ride the Occidental boom: Grant Thornton LLP.  “We have a large audit presence over there and have hired ‘approved’ appraisers in Beijing, Shanghai, and Hong Kong,” reports Neil Beaton.  “It is a tough regulatory environment, but we snagged some good firms early on, and so have satisfied the ‘Chinese ownership’ rule.  We expect to increase 50% percent over the next 12 to 18 months.  Valuation folks are hard to come by,” he adds, “so we’re sending people to the U.S. to get the proper training.”

CRA International adds six new VPs

CRA International, a provider of economic and financial expertise and management consulting services, has just added six new Vice Presidents to its international offices.  In Boston, Mark Bronson is a VP in Transfer Pricing and Bala Dharan in Financial Accounting and Valuation.  Mike Gallup is a VP in Chemicals and Petroleum in Houston, while Anjali Bhasin is a Transfer Pricing VP in Washington, D.C.  Two new VPs in the London office: Neil Checker (Chemicals and Petroleum) and Andrew Hildreth (Financial Economics).


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