Practical tips from the NYSSCPA BV conference
Conference season is in full swing, and BVWire is out collecting the latest news, advice, and developments from top BV practitioners and thought leaders. Here are a few takeaways from the recent NYSSCPA Business Valuation Conference in New York City.
Rewrite your valuation report if you’re headed for court, advises Michael Gregory (Michael Gregory Consulting LLC). Gregory is a former IRS business valuation and engineering territory manager and co-developer of the IRS DLOM Job Aid. By rewriting your report, you can take into account research you do on the judge’s prior rulings and any changes in case law.
Consider size when valuing domains, says Jaime d’Almeida (Duff & Phelps). Shorter Internet domain names are more valuable than longer ones. Last year, 92% of the biggest domain name sales were for names with fewer than 10 characters. He also points out that most domain names are valued at $5,000 to $6,000, but, of course, there are big exceptions (e.g., the recent whiskey.com sale at $3.1 million).
Examine shareholder loans in divorce, advises Christine Baker (Harrison, Meyers, & Pia). The big issue: Is the amount a bona fide debt obligation, or should it be classified as equity? A loan should have a definite period of time and a defined rate of return. But Baker says she rarely sees these terms with amounts transferred from owners, which means they could be considered equity. Key point: If the amount is a real debt, then it’s a marital asset.
Look for more LLC valuation work, at least in New York. The Empire State has no statutory provision that allows LLC members to exit the company without petitioning for a full dissolution, which isn’t easy. But New York courts have created a simpler escape hatch known as an “equitable buyout,” reports attorney Fred Weinstein (Kurzman, Eisenberg, Corbin & Lever). The court can order a fair value buyout of a member for many reasons—even if the members simply don’t get along.
More from the NYSSCPA conference in next week’s BVWire . . .
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Is losing a Daubert challenge a career stopper?
An expert loses a Daubert challenge. The exclusion is a defeat, but does it have to mean the end of a career? Not necessarily, because there are multiple reasons why a court may find testimony inadmissible. An attorney looking to hire an expert will not only want to know what the exclusion rate of that prospective witness is, but also why the expert was excluded.
A review of Daubert cases suggests several possibilities, including:
- The expert underperforms: The expert prepares a valuation that obviously wouldn't hold up in court. This can be avoided. Following certain rules ensures the expert is able to do a good job: don’t take assignments for which you lack the requisite experience or time; don't agree to a deposition for which you are not prepared; and don't let the attorney or client use you as a mouthpiece. Sadly, Daubert cases in which the expert did not follow the rules abound. The consequences are dire because court opinions are public documents and good attorneys will think twice about hiring someone whom the court blasted for submitting subpar work.
- The trial court gets it wrong: Instead of being a gatekeeper and scrutinizing the qualifications of the expert and the methodology used, the court looks at the underlying data, disapproves of it, and excludes the expert’s testimony. With any luck, the expert is vindicated on appeal, as was the case in the 2013 Manpower case (available at BVLaw), in which the 7th Circuit found the trial court overstepped its bounds and reversed. Whether the testimony is good enough to withstand cross-examination and convince the jury is a different issue. Chances are good that an expert facing this situation works again.
- The expert operates in a "no-win" area: One of the most difficult environments in which to work is as a plaintiff's damages expert in patent infringement cases. Concepts such as "smallest salable unit" and “apportioning between revenue from patented features in an accused product and nonpatented components” have stumped many reputable experts. The courts have acknowledged that, while they know when a reasonable royalty base calculation is wrong, they don't necessarily have a good answer for how to get the calculation right. At conferences, experts have complained about the lack of practical guidance from the courts. Experts in this area form a relatively exclusive group, and many recover from a loss and move on to another assignment.
Share your experience: How have you avoided or dealt with Daubert losses? Send us your comments!
Extra: BVR’s upcoming special report on Daubert cases presents a wealth of case law and provides an in-depth examination of the admissibility issues facing experts.
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IRS kicks off ‘limited’ 409A audit project
Tax code Section 409A audits of selected taxpayers are underway. While the initial scope of the audits is limited, this is likely just the first step toward a more expansive project.
Section 409A regulates the tax treatment of nonqualified deferred compensation plans. The IRS audit project will focus on three issues: (1) initial deferral elections; (2) subsequent deferral elections; and (3) payouts under Section 409A, including the six-month delay for specified employees.
The IRS will select no more than 50 employers for the audits, which will be limited to the top 10 highly compensated individuals, according to Thomas D. Scholz, IRS senior technician reviewer, Office of Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. Scholz spoke unofficially May 9 at a session of the American Bar Association Section of Taxation meeting, reports Bloomberg BNA.
More audits likely: Of course, most companies will avoid the 409A audits—for now. “If past history holds true, this program is just a first step in a process that will allow the IRS to hone its audit techniques and areas of inquiry with respect to 409A issues before the program is expanded to more employers,” according to executive pay experts Towers Watson. It advises plan sponsors to periodically conduct self-audits to make sure their plans are in compliance.
Extra: Valuations related to IRC 409A can be tricky. BVR’s Guide to Valuations for IRC 409A Compliance gives a good foundation of knowledge for valuation experts for the most common 409A valuations.
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New ballgame for analyzing revenue under converged standards
Change the way you think about analyzing revenue in financial statements, now that the Financial Accounting Standards Board and the International Accounting Standards Board have released a converged standard on revenue recognition. Ten years in the making, the standard provides substantial enhancements to the quality and consistency of revenue reporting while also improving comparability in the financial statements of companies using IFRS and U.S. GAAP.
Between the lines: While the title of the standard is Revenue From Contracts With Customers, it also affects sales of nonfinancial assets to noncustomers, such as sales of real estate, according to FASB member Marc Siegel, who spoke with Accounting Today. In addition to real estate, he says other industries affected by the new standards will be telecommunications, media, automotive, and software sectors.
The standard will take effect for U.S. public companies for annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods. Companies using IFRS will be required to apply the standard for reporting periods beginning on or after Jan. 1, 2017.
The IASB and FASB will conduct a webinar on Thursday, June 5, to give a high-level overview of the new standard.
Extra: A great deal of valuable information will come from new disclosures required under the converged standard, says FASB Chairman Russell Golden, according to the Journal of Accountancy.
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Two new resources from BVR
BVR announces the release of two new resources to help you stay on top of the year’s most important business valuation news and legal issues.
The Business Valuation Update Yearbook 2014 contains all of the year’s most important developments concerning emerging methodology, evolving approaches, and critical debate. Plus, an included data section is a crucial reference for appraisers to track economic conditions and trends.
The BVR Legal and Court Case Yearbook 2014 contains abstracts of the most critical valuation-related court decisions and also in-depth analyses of the approaches the parties and the courts took to arrive at the decisions. It contains a case summary table, as well as a listing by state/jurisdiction, court, and case name, followed by a one-sentence description of the key valuation issue of each case.
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BV movers . . .
People: Long Island Business News recognizes Steven Marcus, managing partner of Gettry Marcus, as an Outstanding CEO for 2014 … Dan Powers is the new office managing partner of Grant Thornton LLP’s Wichita, Kan., practice. Previously, he was the tax practice leader of the Grant Thornton Shared Services Center in Bangalore, India … Edward F. Saroney III, CPA, of New York Business Valuation Services, is a new member of the 2014 board of directors of the Estate Planning Council of Central New York … Jessica Soppe was promoted to director at CliftonLarsonAllen LLP, where she focuses on business valuation and forensic accounting.
Firms: Cnockaert & Salens bvba of Brugge, Belgium, joins BKR International … KPMG LLP is one of Working Mother magazine's 2014 top five "Best Companies for Multicultural Women.” In related news, KPMG LLP and Rothstein Kass have agreed to merge and situate the firm to become a leading provider for the U.S. hedge fund market.
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In memoriam: John W. Murphy (1935-2014)
BVWire was recently notified of the passing of John Murphy. John founded Atlantic Management Co. (Portsmouth, N.H.) in 1968 and devoted 44 years to the firm before retiring in 2012. He had a love for business valuation and was a pioneer in the field of ESOPs. John had a big impact on the BV community by teaching numerous courses in the Northeast over many years.
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A very special event with Damodaran
BVR is pleased to announce the latest in the evolution of business valuation education. In this exclusive special event, Dr. Aswath Damodaran (Stern School of Business, New York University), one of the most sought-after voices in valuation, will join us for an examination of how to separate the methodologies, approaches, and objectives of valuation and pricing. The three-hour event, Price and Value: Discerning the Difference, an Advanced Workshop, will be held September 10 in New York City.
Attend in person: Limited exclusive premium seating is available for a select group to attend this presentation live in New York while it’s being webcast worldwide. For more information on the special benefits available for live attendees or to reserve your spot to attend in person, contact BVR today at firstname.lastname@example.org; (503) 291-7963 ext. 2.
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Valuing Government Contractors (June 5), featuring Donald Nalley Jr. (Beason & Nalley). With government contractors, we often know more about the customer before we learn about the business. Find out how federal budgets, tax positions, and regulatory compliance affect this surprisingly large segment of the marketplace.
Advanced Workshop on Monte Carlo Simulations: Applications & Examples (June 12), featuring David Dufendach, Randy Heng, and Oksana Westerbeke (all Grant Thornton). In this intensive and interactive four-hour workshop, Dufendach, Heng, and Westerbeke show how to harness the power of Monte Carlo simulations through two exhaustive case studies. Put your misperceptions and misapprehensions about these models to rest, and learn how to effectively put them to use.
Last week, BVR overloaded the Internet with The Duff & Phelps Risk Premium Calculator: Utilizing New Data & Features for 2014, a demo of the most sought-after update to valuation tools to date. Demand for this special live demonstration was so high that a second live encore presentation was aired the following day. Now, this exclusive tour of the Duff & Phelps Risk Premium Calculator, provided by its co-creator, James Harrington (Duff & Phelps), is available for free viewing on BVR’s website. To access this presentation or find out more about the Duff & Phelps Risk Premium Calculator, click here (login required).
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