ASA ‘pleased’ with revisions (so far) to USPAP 2014-15, but still concerned with current draft
Last week, the ASA’s BV Committee submitted its comment letter to the Appraisal Standards Board’s third exposure draft of proposed changes to the 2014-2015 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). The BVC approves and accepts many of the board’s changes, in particular its clarification in the “Report Options” section between a standard appraisal and a restricted appraisal. These two options conform to the ASA’s BV standards, the letter says, and “allow appraisers flexibility in their ‘scope of work’ and the fees they charge.” The BVC also agrees with the new requirement to state the identity of a client and intended users by name or type as well as citing the appraiser’s source for the premise of value.
At the same time, the BVC expressed several continuing concerns:
- As stated in its response to the ASB’s second exposure draft, the BVC still believes the proposed definition of “assignment results,” particularly as related to litigation engagements, contradicts the trend in federal proceedings to exclude draft appraisals from discovery. In addition, defining what items constitute “assignment results” when an appraiser acts as a consulting expert “may not be feasible,” the BVC warns. Should the ASB still adopt its proposal, the BVC suggests it adopt a litigation exception to reduce any confusion and “unintended consequence.”
- Although the ASB has withdrawn its proposed new definition of a report, the BVC worries that a draft report may still fall within the default definition. “We believe that the report should be defined as a ‘certified’ document and should exclude any drafts containing ‘assignment results.’” Otherwise, the term “assignment results” might be construed to include “each and every conclusion the appraiser develops in the course of forming the final opinion, including those contained in both draft reports and final reports.”
- The BVC disagrees with proposed new certification requirements related to prior services as well as current/prospective interests “in their entirety.” The proposal would require disclosure for any services regarding the subject property, which could impose “a potentially damaging breach to the legal concept of enterprise trade-secrets integrity, as well as professional confidentiality,” it says. “As long as the appraiser is independent and objective, any prior involvement is considered confidential information that the appraiser should not disclose.”
“Overall, we were pleased with the changes that the ASB included in the third exposure draft,” says BVC chair Linda Trugman in her weekly E-Update to members. “Perhaps it was because of many of our responses to the first and second draft,” and she encourages all BV appraisers to participate in the standards process by endorsing the BVC’s letter or submitting a separate response.
2013 cost of capital by industry sector, thanks (once again) to Damodaran
In his just-completed data update for 2013, Professor Aswath Damodaran (NYU Stern School of Business) has added a global summary that lists items such as beta and multiples for each sector and company in the covered regions (U.S., Japan, emerging markets, and Europe). With the U.S. data, he has provided an extra feature—at least for the risk measures and multiples—that breaks down the averages by market cap class; he has also added back the data set measuring the effect of capitalizing operating leases on debt ratios and returns on capital. To access his 2013 cost of capital update by industry sector in the U.S, click here.
“Finally, I continue to update separate data sets for India and China,” he says in the introduction to the complete 2013 data update. “While I include companies from both markets in the emerging market dataset, each of these markets is now large enough (> 3,000 firms) to allow for separate analysis.”
The future of DLOM: more complexity, more costs—and more questions
“DLOM is a crapshoot,” says one participant to our latest survey on DLOM methods. According to another, “DLOM studies rarely provide data that I feel comfortable in using in my practice of valuing closely held entities.” Voicing similar frustrations, a third says: “It would be nice if the profession could come to an agreement as to which of the DLOM approaches provides consistent discounts.”
At the same time, one participant posits using the Partnership Profiles data extensively for FLP or asset holding valuations and the FMV Restricted Stock data and a “personal variation of QMDM” for nearly all operating business valuations. But compare these comments from other respondents:
- “Despite the constant drumbeat to the contrary, benchmarking from restricted stock studies is still the most sensible method.”
- “I usually try to use the Partnership Profiles methodology because I am very comfortable with its validity. The QMDM is a close second. [I do not use the] other methods … because either [they] just do not really reflect what I am valuing or they are too ‘spacy’ to try to apply.”
- “All of the methods are flawed in some way (some more than others). So at the end of the day, no matter what method you use, it still comes down to the subjectivity of the appraiser. So why not skip the facade of using flawed approaches and just explain why you selected the particular DLOM and back up the specifics of the actual number with ‘professional judgment’?”
Still others want to see more emphasis on statistical approaches. “Why is a linear regression model comparing restricted stocks to public stocks not given much emphasis in determining the DLOM? Most reports use the mean discount then subjectively adjust the discount based on these factors. Research that I have read shows that the discount is substantially less using least squares regression and has a high R2, yet this approach seems to gain little support. Any ideas on why this is?”
Yet the increasing multiplicity and complexity of methods (such as the Asian put model) reveal “sophistication without history of use,” comments a participant. “It sounds like quants are trying to take over the profession and win cases with fantastic Rube Goldberg methodology. It reminds me of derivatives where you have to pay the source bank for the value.”
Finally, even if BV appraisers could agree on a consistent, credible approach, most have heard the rule of thumb suggesting they spend 20% to 30% of a total engagement on the DLOM determination. “I don't disagree in theory,” says one survey participant, “but when you are doing small valuations of closely held and family owned businesses, the added cost to spend that much time would cause clients to not get the [complete] work or go elsewhere.”
One thing is certain: The debate will continue. Writing to us directly, Bruce Johnson (Munroe, Park & Johnson) notes the survey omitted the “empirical method” as an option, also called the Johnson/Park approach, which he recently presented in a BVR-sponsored webinar, “How to Quantify and Support Your DLOM Using Rates of Return.” “Based on the feedback from people at courses we teach, a lot of people use it,” he says. “It has also been successfully used in court. It may be worthwhile to include it in the survey next year, as it will probably be presented at the upcoming ASA and AICPA conferences.”
DLOM discussion continues this week: Tomorrow, January 31, don’t miss John Stockdale (John Stockdale Business Valuations) as he presents the fourth and final installment of our Advanced DLOM Series, “A Review of DLOM Volatility and Option Model.”
Expert’s apportionment is not enough to save patent damages—but it saves copyright claims
After a jury awarded the plaintiff $60 million for copyright infringement and just over $51 million for patent infringement, the defendant appealed both verdicts, claiming they lacked sufficient evidence.
In particular, the defendant argued that the standard of copyright damages mirrors that of patent law, i.e., that the plaintiff had to prove its copyrighted features drove consumer demand for the infringing product. But that overstated the standard, the court held. The plaintiff must only establish causation, i.e., that “but for” the infringement, the defendant wouldn’t have made its gross sales. “The burden then shifts to [the defendant] to apportion that gross revenue between profit and expenses and among infringing and non-infringing features of the product.”
Rather than apportion the profits, however, the defendant’s expert said it was only obligated to pay the amount saved by copying the plaintiff’s copyrighted information, instead of generating it on its own, which amounted to no more than $6,000. In response, the court found the plaintiff didn’t have to offer an expert to apportion damages—but it was a good thing it did, because his rebuttal testimony showed the defendant made $93 million in net profits, sufficient to support the jury’s $60 million award.
Entire market value is exception rather than rule. The expert’s apportionment analysis for patent damages did not fare so well. The current standard requires experts to calculate a reasonable royalty using the “smallest saleable unit,” the court said. “That is the rule.” If they don’t, then they can only use the entire market value of the infringing product if the patented feature drives consumer demand. In this case, the expert relied on gross sales of the defendant’s infringing product, which he believed was the “smallest saleable unit.” The court disagreed, finding the product consisted of many patented and unpatented parts.
Even so, the plaintiff argued, its expert appropriately apportioned damages between the product’s patented and unpatented features. Not good enough, the court said: “The Federal Circuit has rejected [this] methodology. Absent evidence that the patented feature drives demand, [the plaintiff’s expert] should not have used the entire market value … to establish its royalty base.” The court found the same flaws undermined his lost profits calculus, and reversed the $51 million patent award. Read the complete digest of Brocade Communication Systems, Inc. v. A10 Networks, Inc., 2013 U.S. Dist. LEXIS 8113 (Jan. 10, 2013) in the March 2013 Business Valuation Update; the district court’s decision will be posted soon at BVLaw.
Appraisal Practices Board seeks new members
The Appraisal Foundation has begun its search for qualified candidates to fill four upcoming vacancies on its Appraisal Practices Board (APB). The foundation “is always interested in expanding the diversity of its boards by considering applications from appraisers involved in various appraisal disciplines such as real property, business valuation or personal property,” an accompanying release says.
The APB is charged with issuing voluntary guidance, known as a Valuation Advisory, which focuses on valuation methods, techniques, and other topics that can apply to all disciplines within the appraisal profession. The board’s nominating committee will consider the following qualifications in its search for applicants:
- A minimum of 10 years of appraisal experience;
- A working knowledge of the Uniform Standards of Professional Appraisal Practice (USPAP);
- Familiarity with valuation methodology and techniques;
- Experience in writing on valuation topics and/or curriculum development;
- Experience with public speaking and/or teaching on valuation topics; and
- Experience in serving on a publicly accountable board.
Those selected for APB positions will serve a one-, two-, or three-year term commencing July 1, 2013. Applications are now available online at The Appraisal Foundation. To request an application via email or ask any questions, contact Arika Cole at firstname.lastname@example.org with "2013 APB APPLICATION REQUEST" in the subject line and your full name, email address, and phone number in the body of the message. Completed applications must be received by April 2, 2013.
Future of IFRS may depend on Big Four accounting firms, says IASB chair
“In many ways, Europe’s decision to adopt IFRS in 2005 was a leap into the unknown,” according to Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), in recent remarks at the Cass Business School in London. “No one had tried to apply the same, word-for-word set of accounting standards across such a diverse range of economies and cultures. The rest of the world looked on with interest.”
The IASB chair was responding to a just-released report by the Centre for Financial Analysis and Reporting Research at Cass. The report, Accounting for Asset Impairment: A Test for IFRS Compliance Across Europe, shows inconsistencies in IFRS application and compliance by European-listed companies, particularly in impairment reporting practices. He was “not surprised” by the report, which also found that higher quality reporting is more likely in countries with a strong regulatory environment. A recent SEC staff report on IFRS compliance came to similar conclusions, he said. “This goes to show that in an economy as sophisticated as the United States, using a deeply entrenched national GAAP, you still see challenges with consistent application of the standards.”
As for those who cite the inconsistency of IFRS as a reason for nonadoption, Hoogervorst said: “This argument is, of course, nonsense. The truth is that even an unevenly applied global standard provides much more global comparability than an equally unevenly applied multitude of diverging national standards.” Moreover, “without a global standard, there is absolutely no chance you will ever arrive at global comparability. IFRS vastly improves the opportunities to improve application around the world.”
In the immediate future, the IASB will continue to focus on five areas, including improving IFRS implementation, education, enforcement, and international cooperation. “Addressing the challenge of consistency requires coordinated action by standard-setters, auditors, regulators and others,” Hoogervorst said. With their global reach and resources, “the large accounting firms have a particular important role to play.”
As one cutting-edge CPE symposium ends,
On February 5, Linda Trugman (Trugman Valuation) and attorney L. Paul Hood Jr. (Paul Hood Services) will conclude BVR’s 5th Annual Online Symposium on Estate & Gift Tax with “Recent Cases, Rulings and Interpretations in Estate & Gift Tax Valuation,” a discussion of the latest court decisions and what they mean for appraisers in the tax arena.
On February 28, the Online Symposium on Economic Damages begins with the “Advanced Workshop on Lost Profits Calculations,” an intensive four-hour webinar featuring Robert Gray and James O’Brien (both ParenteBeard). For current, cutting-edge CPE all year long, subscribe to the entire 10-part Symposium by clicking here now.
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