What Level of Disclosure Will Auditors Need for Fair Value Assessments Performed Under the New FASB Standards?
FASB Chair Robert Herz, the keynote speaker at NACVA’s (www.nacva.com) Thirteenth Annual National Consultant’s Conference in San Francisco last week, outlined his expectations of what auditors will expect from fair value analyses. Primarily, auditors will want to know what level of valuations were performed within a three-level hierarchy, and the effect of these measurements on income for the period, he said. The three levels are:
Level 1—observable market inputs that represent quoted prices in active markets for the asset or liability
Level 2—observable market inputs other than quoted prices in active markets for the asset or liability, including market-corroborated inputs
Level 3—unobservable market inputs developed based on reporting entity’s own data adjusted to exclude factors specific to reporting entity if market participants would exclude those factors
Only time will tell how these standards are challenged in court, or practiced by the Big Three…for complete coverage of Herz’ remarks at NACVA, see the July issue of Business Valuation Update, available at www.bvresources.com. And, the best overall source on the new fair value standards is Alfred King’s new book Fair Value for Financial Reporting (Wiley), released in May, and available at www.amazon.com.
A Warren Buffett Valuation Quote to Remember
Warren Miller (Beckmill Research, Lexington VA), forwarded a favorite Warren Buffett quote that “bears directly on my approach to valuation.” At Herb Allen’s annual retreat for media leaders and investors a few years ago, Buffett said “The key to investing in not assessing how much an industry is going to affect society or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” The quote was later reprinted in Fortune.
Denial, Anger, Bargaining, Depression, and, Finally,
Acceptance of Tax Affecting
Perhaps it’s a bad sign that, during BVR’s teleconference last week, George Hawkins (Banister Financial, Charlotte, NC) referred to Kubler-Ross’ five stages of grief when summarizing the BV profession’s response to tax affecting as a result of the Gross case. The good news, he concludes, is that “we’ve moved beyond the ‘should we or shouldn’t we’ stage. The answer, many of us now agree, is a definite ‘yes’.”
Several experts have proposed and tested methodologies for documenting the impact of pass-through tax benefits on value—Roger Grabowski, Chris Mercer, Chris Treharne, and Dan Van Vleet, among others. Nancy Fannon (Fannon Financial Group, Portland ME) stressed that, while the approaches differ, there’s a building consensus of key factors in all the models. Further, Michael Paschall (Banister Financial) and Dan Van Vleet (Duff & Phelps) confirmed that these methods can all pass Daubert challenges (though Dan makes a strong point for the relative simplicity of describing his SEAM method in the courtroom).
“You have to provide analysis in your valuation reports on how you handled this issue,” says Hawkins. “The IRS is only going to get to get tougher on this.”
To order a CD or transcript of the session, or to sign up for BVR’s August 15th teleconference on the AICPA BV Standards (with panelists Ron Seigneur, Jay Fishman, Ed Dupke, and Tom Hilton), go to www.bvresources.com.
A Much-deserved Plug for the ‘Behind-the-Scenes’ BV Analyst
In BVU’s write-up of Farndale Co., L.L.C. and Val Particpations, S.A. v. Folco Gibellina and Accuma, S.p.A, SA (May 2006) we failed to mention that Robert E. Faulkner, CPA, ABV, CIRA (Faulkner and Thompson, P.A. Rock Hill, S.C.) was instrumental in providing assistance to plaintiffs’ attorneys. He was also largely “invisible”—as are most BV analysts who sign on as “consultants” to a case. In the initial stages of the litigation, which began with a related but unreported case, Mr. Faulkner and his firm provided forensic accounting and appraisal review services, and logged more hours on the two cases than any other testifying expert.
Educating Judges 101
BV professionals who appear in court are familiar with the problems of getting judges and juries to understand valuation basics—particularly the idea of risk. Hats off to Jack London (Chattanooga, TN) who says that he often starts this part of his testimony with some version of the phrase: "On one end of the scale you have treasury bonds. On the other, you have a dynamite factory. My job is to assess where this business falls in the middle."
There’s No Risk Bigger Than a Business Partner…
Especially This One
Jay Darby (Greenberg Traurig, Boston) is quoted in the current issue of CCH's Business Valuation Alert as suggesting that students "think of the Internal Revenue Code as a sophisticated partnership agreement between the government and every U.S. person...the bottom line is that the US government is your mandatory partner in all economic and business endeavors. It is quick to claim a share of profits in good years, but far less willing to share losses. The government is also able to change the terms of your partnership agreement at any time without your consent." Darby suggests likely tax minimization strategies, if known to the business valuator (he cites equity swaps where owners "trade up" to equity in a larger business), could influence an analysis.
Further Evidence of the Growing Importance
of the BV Profession
First, a new academic journal on business valuation: James Hoffman and Brad Ewing, professors at Texas Tech, are the co-editors of a new electronic publication, the Journal of Business Valuation and Economic Loss Analysis. The first issue, due in September, "will consolidate the research from finance, accounting, and sometimes business strategy research to add academic rigor with a sense of practicality," says Hoffman. Subscriptions are $35 per year, and are available at www.bepress.com/jbvela.
And, second, Chris Mercer, in his blog last week (www.merceronvalue.com), points out that expert witness services are growing at 40% per year. BV firms should be strategizing about how to win more of this high growth market. Mercer notes that the growth of the expert witness business has been the subject of several blog posts recently. “If I did not use the blog-gathering power of My Yahoo!, I'd have missed all this information. Reading blogs, I have found, is a good way to access information I might otherwise not have seen,” Chris comments.
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