January 8, 2014 | Issue #136-1  

Can the BV profession stay self-regulated?

That was the question raised by several speakers at the 8th International Conference on the Valuation of Plant Machinery and Equipment (ICVPME) in St. Petersburg, Russia. Raymond Rath (Globalview Advisors LLC), who attended the conference and presented a session on fixed asset valuation, tells BVWire that Sir David Tweedie, current chair of the International Valuation Standards Council, stressed the continued need for increased standardization of valuation practice in the overall valuation profession. Sir David highlighted comments by the then acting chief accountant (now chief accountant) of the SEC, Paul Beswick, about the fragmented nature of the valuation profession in the United States and the concerns this creates for third parties that rely on valuations. Sir David and other speakers raised the question of whether the valuation profession can continue to be a self-regulated profession or whether—similar to the accounting profession in the U.S.—greater government oversight will be warranted.

7th Circuit redeems expert’s business interruption loss analysis—for now

Under Daubert, district courts serve as gatekeepers to ensure that expert testimony is reliable before it is presented to a jury. But “reliable” with regard to what? Methodology? Data? This was the central question the 7th Circuit recently answered in reviewing a district court’s decision to exclude the plaintiff’s damages expert based on his data selection.

Business downfall: A building collapse in 2006 damaged the plaintiff’s Paris office. In addition to the property damage, the plaintiff was unable to conduct business, so it lost income. Its claims for insurance coverage triggered a dispute with the defendant insurer, which the parties litigated in federal district court. The plaintiff’s damages expert calculated a business interruption loss of over €5.1 million. His determination followed the general procedure set down in the insurance policy—computing lost revenues minus noncontinuous expenses—and the method for estimating the various inputs. A policy provision required that in calculating net profit “due consideration shall be given to the experience of the business before the date of damage or destruction and to the probable experience thereafter had no loss occurred.” By comparing the total revenues from the five-month period that preceded the collapse to total revenues generated in the same five-month period in 2005, the expert estimated a growth rate of 7.76%. Even though he had reviewed data going back to 2003—and the historical data indicated a downward trend—he decided to use a shorter period from which to extrapolate the rate based on company information that new management and policies had turned the business around by the end of 2005.

Ruling on the defendants’ Daubert motion, the district court found his calculation unreliable. Although the expert had used an “appropriate and recognized method” to compute projected revenues, his “analysis [broke] down” when it came to his estimated growth rate, “one of the most important parts of the business-interruption calculation.” He was not “an expert on business management,” and his conversations with the company’s managers were not a reliable basis for the revenue forecast. Had he selected a period that was not so short, the court “might have found his analysis reliable.” The plaintiff asked the district court for reconsideration based on additional information on how the expert had developed the growth rate, but to no avail. In excluding the testimony, the court effectively nixed the plaintiff’s business interruption claim.

The plaintiff was able to salvage its claim by appealing to the 7th Circuit. At the start of its analysis, the Court of Appeals noted that Daubert gives district courts considerable—but not unlimited—leeway to determine whether expert testimony is reliable. “Reliability, however, is primarily a question of the validity of the methodology employed by an expert, not the quality of the data used in applying the methodology or the conclusions produced.” In other words, the jury, as the trier of fact, not the court, gets to decide whether the data underlying the expert’s analysis is sound and whether the expert’s conclusions are correct.

Here, after the district court found the expert’s methodology was reliable, it should have stopped its analysis. Instead, it “drilled to a third level” to evaluate the quality of the data inputs the expert chose for his growth rate extrapolations. In so doing, it “unduly scrutinized” the quality of the data the expert used for his model, the appellate court said. Therefore, it reversed and remanded for a fuller evaluation of the testimony.

Find an extended discussion of Manpower, Inc. v. Ins. Co. of Pa., LLC, 2013 U.S. App. LEXIS 20959 (Oct. 16, 2013), in the February issue of Business Valuation Update; the court opinion will be available soon at BVLaw. Digests of the earlier district court rulings and the opinions are also available there.

Exposure draft on valuation of customer-related assets

The Appraisal Practices Board (APB) has issued an exposure draft, The Valuation of Customer-Related Assets. All interested parties are encouraged to comment in writing to the APB before the March 1 deadline. Written comments can be submitted by mail, email, and facsimile.

By mail to: Working Group 2—Customer-Related Assets, c/o Paula Douglas Seidel, The Appraisal Foundation, 1155 15th Street NW, Suite 1111, Washington, DC 20005. Email: VFRcomments@appraisalfoundation.org. Fax: 202-347-7727.

Growing need for expert witness skills sparks new conference

The American Society of Appraisers will host a conference, How to Be a Successful and Effective Expert Witness, March 5-6 in San Francisco. There’s a growing need for valuation professionals to be able to communicate effectively and present conclusions in court. “It only takes reading a small number of Tax Court cases to realize that valuation expert testimony often fails to persuade,” says Dennis A. Webb, ASA, who is both a business valuation and real property appraiser. “Experts that find the facts, connect the dots and tell the story provide testimony that attorneys can relate to and that the court needs. Persuasive experts make a major contribution to the court and to the profession—we need a good deal more of them.”

BV movers . . .

BVWire is pleased to offer a new feature to highlight news of business valuation professionals and firms. Please email announcements to editor@bvwire.com.

People: Beth Fenton joins the team at HSSK as director of business development at its Dallas office. Beth’s main focus at HSSK is to help the firm find new opportunities to provide its excellent service in the areas of business valuation, litigation consulting, and financial restructuring … Dan Vuckovich was recently appointed to the State of Montana’s Board of Public Accountants … PJ Patel has been named co-CEO of Valuation Research Corp. Mark Brattebo, who served as co-CEO with William Hughes since 2001, will step down from day-to-day management but will continue to serve his existing clients, assist with the transition, and remain on VRC's board. Hughes will continue to serve with Patel as co-CEO … Greg Stephens has been named chief appraiser to accompany his role as senior vice president of appraisal operations and compliance at Metro-West Appraisal … Russ Williams and Chris Wolf are new associates at Intrinsic, which is expanding its business valuation practice … Gary Korn will lead the new valuation services line at MorganFranklin Consulting … Melinda Harper, founder of Harper Hofer & Associates, has been named to the board of Colorado HealthOP … Monica Kaden, a principal at Fischer Barr & Wissinger, recently conducted a "Health Care Valuation" presentation at Brach Eichler, a law firm in Roseland, N.J. … Mark Warshavsky (Gettry Marcus CPA, P.C.) gave a presentation, “Drafting Business Valuation and Buy-Sell Provisions for New York Closely Held Limited Liability Companies,” to an audience of 80 attorneys in Melville, N.Y.

Firms: Alpern Rosenthal merges with BDO USA, pushing BDO to over $800 million in revenue … Bonadio Group has moved to Utica, N.Y., with the acquisition of Audit Associates of Vermont and will absorb Stulmaker, Kohn & Richardson, an Albany firm, adding two partners and five other employees to its Capital Region operations … Tucker & Meltzer announced the opening of a York, Pa., office under the direction of Glenn Spinello, CPA/ABV, CVA. Also working from the York office is Nic Hoffmaster, ASA … Alvarez & Marsal continues rapid growth of its valuation practice by adding four managing directors: Nausheer Allibhoy, Robert Corso, Michael Halliwell, and William Snyder.

Fair value, shareholder loans ring in a new year of CPE events

Take an in-depth look at fair value in BVR’s latest webinar series, the Online Symposium on Fair Value Measurement. Each month throughout the year, the webinars will critically examine best practices, professional guidance, and judicial decisions that determine the practices of measuring fair value. First up, on January 14, is Overview of Fair Value Accounting (ASC Topics 820, 805, 350 and 360), featuring series curator Mark Zyla (Acuitas Inc.) on the state of fair value measurement. From the history of FASB guidance to the future of fair value measurement, Zyla’s critical look at fair value practices is not to be missed!

The valuation of shareholder loans is a tricky issue—and more so in the context of divorce proceedings. In Valuing Shareholder Loans in Divorce (January 16), Christine Baker (Meyers, Harrison & Pia) sorts it all out and addresses the identification, valuation, and presentation of shareholder loan valuations in marital dissolution cases.


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