Can a customer relationship ever warrant an indefinite life?

Most respondents to this question posed in the popular BV Professionals discussion group on LinkedIn say no, not only because it would be a “hard sell” to auditors (five years ago, as one commenter notes, who would have thought customers like General Motors could go away or Lehman Brothers lose its brand?).

More comments:

  • “I have a client whose customers are about as good a candidate for indefinite-lived as you can get. Some of their customers have been around for 50 years, and we (with management input) have given their customer relations a finite life. I think you would need to make a VERY strong case, and even then it may not fly with the auditors.”
  • “We had a client whose customer contracts were ‘evergreen’ due to state legislation. It was hard for the auditors to argue with that.”
  • “Even in the case of an ‘evergreen’ contract…I would suggest that state legislation could change in the future… Given the reality of relationships: they are ALL perishable, and…should NEVER have an indefinite life.”
  • “As a rule I never say never. I began doing purchase allocations for financial reporting…back in 1995 and I have had only one case: a captive customer situation. If the customer went away, the business was out of business.”

Analysts also might want to look at ASC 350, Intangibles—Goodwill and Other (formerly FAS 142) for insight into what auditors are looking for, in particular, paragraph 350-30-55-28F. And they will certainly want to look for Valuation of Customer-Related Intangible Assets for Financial Reporting Purposes, forthcoming best practices guidance from The Appraisal Foundation’s Working Group #2. The discussion paper has been through one complete review, says P.J. Patel (Valuation Research Corp.), who sits on the Working Group. He expects two to three more reviews before public exposure, most likely this summer. The discussion draft will touch on economic vs. accounting lives, but consensus suggests perpetual customers “are very rare,” Patel says. “In practice, I’ve never concluded an indefinite life.”

Quick reference guide to FASB Codification project

By the way, if you’re still learning the new, codified numbers assigned to former FASB accounting standards, then you may want to download The Codification at a Glance, recently posted by Accounting Insights (National Professional Standards Group and McGladrey & Pullen, CPAs). As reported last summer, (see BVWire# 88-4), the FASB Accounting Standards Codification has become the single source of authoritative nongovernmental U.S. GAAP, other than SEC guidance. The new download helps users navigate the Codification by providing a comprehensive summary of Codification Topics and Sections, and cross-referencing some commonly used accounting standards.

Goodwill hunting: new survey searches for standard definition

“Many business valuations are influenced by goodwill, but amazingly, there is no standard, functional definition of personal goodwill,” says David Wood (Wood Valuation).To help correct the problem, Wood and BVR’s Adam Manson reviewed the leading business valuation textbooks, articles, and court cases. They assembled the definitions in a summary table and then analyzed each entry according to its key words, phrases, and concepts. Personal Goodwill: A Survey of Definitions is now available as a free download from BVResources.

 “We believe that by understanding these factors, every business appraiser will be better able to defend their personal goodwill conclusions,” Wood and Manson say. Look for a complete discussion of their research and results—including a proposed functional definition of personal goodwill—in the next (April 2010) Business Valuation Update™. The article is also available in the newly updated, 2010 edition of BVR’s Guide to Personal v. Enterprise Goodwill.

Help with the search. In the meantime, this was their first review, and the authors have agreed to perform an annual update. “I am sure that we missed someone’s definition of personal goodwill or a court case,” Wood says. “If you know of one, please email us or”  

Implied minority discounts: not just a Delaware problem

A recent case in federal district court demonstrates the confusion that still clouds the concept of an implied minority discount. In Kaplan v. First Hartford Corp., 2009 WL 737681 (D. Me. 2009), a statutory fair value appraisal action, the company’s expert argued strongly in support of an implied minority discount (IMD):

I understand that the statutory definition of fair value for appraisal purposes adopted by [state law] does not allow for discounts for lack of marketability or for a minority stake. However, in my opinion it is necessary to apply a minority discount to [the subject company’s] NAV in order to make the NAV comparable to the values based on the other two  methods—market value and investment value. … In other words, [the company’s] NAV per share represents the amount that someone may be willing to pay to acquire a hundred percent stake in the [company], while the market value and investment value represent the amount an investor may be willing to pay to acquire a minority stake in [the company].

Nancy Fannon, an expert on the same side of the case, disagreed.  “My report and testimony discussed why the public market was not stated at a discount and why a control premium would not apply,” she tells BVWire™.  Ultimately, the court found the public price had a built-in minority discount and adjusted the company’s market value (from Pink Sheets data) upward for the IMD. “I think it’s easy to get anchored to the notion that an IMD exists” says Fannon.  “Part of the problem is we have so much precedent that tells us so. But I don’t think it’s often, or perhaps even usually, the case.”

Do you still adjust public company data for an implicit discount? Then you’ll want to join Gil Matthews and Professor Michael Wachter this Friday, March 19, 2010, for the BVR teleconference, “Implied Minority Discounts in Statutory Fair Value: The Doctrine that Won’t Die.”  Learn the strange history of the IMD and how to reconcile the divergence between judicial precedent and current, best BV practice. Two CPE credits available: Register here

New article by Ibbotson challenges common wisdom on importance of asset allocation

In “The Importance of Asset Allocation,” well-known researcher Roger G. Ibbotson, founder of Ibbotson Associates (and current CIO of Zebra Capital and Yale business school professor) disputes the widely held notion that asset allocation policy explains more than 90% of performance. In the article, currently available in the March/April 2010 CFA Institute Financial Analyst Journal, Ibbotson and his research team demonstrate that general market movement accounts for about 75% of a typical fund’s variation over time, with the remaining portion split almost evenly between specific asset allocation and active management.

“Most of the variation in a typical fund’s return comes from market movement,” the authors explain. “Funds differ by asset allocation, but almost all of them participate in the general market instead of just holding cash.” In other words, the rising tide of market movements lifts all boats, just as an economic drought will drop them—and asset allocation will protect investors from this tidal movement much less than we all believed.

FASB/IASB issue joint exposure draft on Conceptual Framework

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have just released for public comment their Conceptual Framework for Financial Reporting: The Reporting Entity. In particular, the Boards are soliciting input to four questions:

  • Is a reporting entity a “circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders, and other creditors…?” If not, why?
  • If an entity that controls one or more entities prepares financial reports, should it present consolidated financial statements? Do you agree with the definition of entity control? If not, why?
  • Should a portion of an entity qualify as a reporting entity if its economic activities can be distinguished from the rest of the entity and its financial information is potentially useful to others (investors, lenders, etc.) about whether to provide it resources? If not, why?
  • The FASB and the IASB are developing common consolidation standards that would apply to all types of entities. Should they delay the completion of the reporting entity concept until they have issued those standards? If not, why?

Comments to either Board are due by July 16, 2010, as per the instructions in the Exposure Draft; the FASB and IASB will consider all submissions jointly.


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