Revised 2010-2011 USPAP: What will the changes mean to BV experts?
On Monday, June 8, The Appraisal Foundation (TAF) announced that its Appraisal Standards Board (ASB) adopted revisions for the 2010-2011 edition of the Uniform Standards of Professional Appraisal Practice (USPAP) at its public meeting in New Orleans. The 2010-2011 USPAP will be valid for two years, effective January 1, 2010 through December 31, 2011.
As with the current USPAP, the new edition will include guidance from the ASB in both USPAP Advisory Opinions and the USPAP Frequently Asked Questions (FAQs). The new USPAP should be available by October 1, 2009. Most of the revisions that will become effective on January 1, 2010 involved improving the clarity, understandability, and enforceability of the Ethics Rule, the Competency Rule, and Standard 3: Appraisal Review, Development and Reporting. The ASB has issued a Summary of Actions document, which explains the changes and their rationale.
New Study on LEAPS Put Options: DLOM clearly valuation-date specific
Ronald Seaman’s new study, “Minimum Marketability Discounts–4th Edition: A Study of Discounts For Lack of Marketability Based on LEAPS Put Options,” shows that costs of price protection/discounts vary by date and do not remain constant in size over time. That data further suggest a discount for lack of marketability analysis should be valuation-date specific, Seaman explains in his recent Business Valuation Update™ article. Additional findings:
- Holding period: The median cost/discount for all companies in the 2006 study was 13.9% for the 18-month LEAPS put option and 17.4% for the 30-month option, an increase of 3.5%. In 2008, the median cost for all companies increased to 33.5% for the 14-month option and 40.6% for the 26-month option, an increase of 7.2%.
- Industry: Discounts vary by industry. The differences are more pronounced as the definition of the industry becomes more specific or more detailed.
- Company size: Company size has a clear and major affect on discounts: The smaller the company, in revenues or assets, the larger the discount. In November 2008, discounts for companies with less than $1 billion in revenues often were from 35% to 50%.
- Company risk: As was the case in the 2006 survey, company risk has a major influence on discounts. The greater the risk, as measured by the company’s beta, the greater the discount.
For your own copy of Seaman’s article, visit BVR’s Free Resources page.
Entertainers and physicians at center stage in upcoming BVR teleconferences
BVR’s outstanding teleconference series continues to offer premium training, insight, and CPE through our 100-minute interactive format. Next up: “Valuing Intellectual Property in Entertainment and the Arts” with Kevin Yeanoplos, Bill Sipes, and Mike Pellegrino, today, June 10 at 10:00am PT/1:00pm ET. These valuation experts will discuss the classic challenges to valuing revenue-producing catalogues of music, film, literature, and other media along with emerging trends driven by recent changes in technology and distribution. Attendees will learn how these changes have broadened and complicated valuation opportunities, and will also be given access to an original song, written and performed by Yeanoplos. To find more information or to register, click here.
On Tuesday, June 23 at 10:00am PT/1:00pm ET, “BVR’s Teleconference Series on Healthcare Valuation (Part 2 of 3)” will continue. Featuring Mark Dietrich, Douglas Smith, Timothy Smith, and moderator Carol Carden, this second installment will cover physician compensation, diagnostic imaging center valuation, and medical practice valuation. For registration or more information—including how Part 1 attendees can receive $50 off admission to Part II in the series, click here.
Admit report weaknesses up front, before other side does
As judges boost their knowledge and more IRS engineers and appraisers become BV-credentialed, they are better able to spot the weaknesses in valuation reports. Should you admit them up front? It’s a question that Mike Eggers, principal of American Business Appraisers in San Diego, recently asked a panel of distinguished experts at NACVA and the IBA’s 2009 Consultants Conference in Boston. Absolutely, responded U.S. Tax Court judge, the Honorable David Laro. “If you don’t address them, the other side will, or the court will have questions.” For example, since deciding Mandelbaum in 1999, Laro has become well acquainted with the five models most commonly used to calculate marketability discounts. Now, if a report does not include all of them, “I may think you’re being less than candid.” However, if the appraiser discusses and analyzes the omitted methods, explains why they were not applicable to the case, “then you’ll raise the sophistication of your report up a notch.”
What other elements must a report have? Ethics, independence, intellectual honesty, and transparency, Laro said. “When you offer a report that is free of bias and advocacy, independently arrived at and transparent, then this is the best we can have.” Howard Lewis, former national program manager of the IRS and current IBA executive director, seconded these requirements, as applied to the Service. “It is not the job of the IRS to be advocates,” he said. IRS appraisers and examiners are “charged with the responsibility to be fair, honest and unbiased.” At the same time, they regularly see only the worst-case appraisals, and this system-bias led even Lewis to develop a bias early in his career, which he focused on correcting in later years, in both himself and his fellow engineers. The point: “Understand the perspective of the IRS,” he said. “Maybe it could even be something to talk about.”
Internally generated quality assurance checklists help experts bullet-proof their appraisal reports
BV experts must be critical and skeptical of their own work, explained Frank Rosillo of The Valuations & Forensics Advisory. During a session at NACVA and the IBA’s 2009 Consultants Conference in Boston, entitled “How to Set up an Effective Internal Review Process for your Appraisal Practice,” Rosillo told attendees that all work needs to be relevant and probative and they should be able to answer eight Quality Assurance Checklist questions about appraisal reports. Three representative questions are: 1) Does the appraisal report contain sufficient data, assumptions, and explanations to support the opinion of value in accordance with generally accepted appraisal practices in the USA? 2) Were methodologies properly applied? 3) Does the appraisal report meet applicable professional standards?
Know, too, that if you do not have an Internal Review Process, now is the time to create one. The reason: Odds are you will eventually be asked about your processes in court. On another note, Frank told attendees that he reviews a number of BV reports in his work and he finds the two things missing most often are 1) a balance sheet on the valuation date and 2) an analysis of working capital as of the valuation date and projections going forward. These are two “must have’s” for every report, he says. Look for more insights from Rosillo in an upcoming BVU article.
PCAOB chair Olson resigns
Mark Olson announced his resignation as Chairman of the Public Company Accounting Oversight Board (PCAOB) this past Monday. The resignation is effective July 31, 2009. Olson was named Chairman of the PCAOB by the Securities & Exchange Commission effective July 1, 2006.
Lawyers fear industry layoffs will continue, new data show
What do you do when the lawyer who served as a steady source of work is now unemployed? Sounds extreme, but such could be the case in a recession unlike any other in recent memory. Indeed, lawyers themselves expect the recession to be deep, wide, and last for years to come.
Consider: Almost one-third of U.S. lawyers expect their employers will have layoffs, according to a recent survey conducted by the American Bar Association Journal—the flagship magazine of the American Bar Association—that received 14,307 responses from attorneys nationwide. (The poll is part of a special issue devoted entirely to the recession.) The survey also found 31% of lawyers expect that, by the end of 2009, someone in their workplaces will have lost his or her job because of the recession. Among that 31%, 19% expect that they will lose their own jobs next year. Asked for thoughts on when the economy will improve for the legal profession, 52% of respondents said in 2010; 22% answered 2011; 10% said 2012; 9% said 2009; and 7% believed that it’ll never be the same.
How BV experts can strengthen relationships with members of the Bar during these tough times: Provide a resource. “We need to soak them with value in the form of information, tips, and knowledge before we ever ask for a project,” explained Mel Abraham, president of Mel H. Abraham, Inc. Send them articles or offer to do free seminars or webinars for law firm or local Bar association groups. You might even qualify for CPE credit, depending on your CPE society or governing foundation.
Willamette’s Stevens elected to ASA’s BV Committee
Trey Stevens, the Washington DC office director for Willamette Management Associates, was recently elected to serve on the American Society of Appraisers’ (ASA) Business Valuation Committee. The Business Valuation Committee directs the administrative functions of the business valuation discipline within the ASA. In conjunction with the ASA Board of Governors, the Committee develops and implements policies, procedures, and professional standards for the roughly 2,000 members within the business valuation discipline, who elect the 18 members of the Committee to serve staggered three-year terms.