Mercer wants a common framework for statutory fair value determinations

Many readers commenting on the (mis)application of a marketability discount in New York statutory appraisal actions agree the problem lies with judges who lack training in valuation concepts and often build their value determinations on questionable or stale precedent (see last week’s BVWire). Chris Mercer (Mercer Capital) says a case in point is the seminal Beway case, in which the Court of Appeals of New York “approved a methodology for fixing the fair value of minority shares in a close corporation.” Mercer points out that the case was published many (20!) years ago, and the court, in discussing marketability discounts, relied on old restricted stock data.

Blog series: Mercer also joins those valuators who argue that if appraisers hope to achieve sounder valuation-related outcomes in statutory fair value cases, they have to do a better job in their analysis and in educating judges. Courts, Mercer says, “have not been consistently provided with good valuation analysis and vocabulary.” To improve matters, he is writing a series of blog posts on “Statutory Fair Value and Business Valuation.” In Post No. 7, he examines the original levels of value chart and how and why it has morphed from three to four levels over time. A future post will “examine the cash flow and risk characteristics associated with each of the four levels,” he writes. The overall goal of the series is to "create a theoretical framework and vocabulary with which we can talk about the valuation concepts that arise in statutory fair value determinations,” he says. For more on the post, click here.

Other reading: An article, “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” written by Gil Matthews and Michelle Patterson (both with Sutter Securities) appears in the January issue of Business Valuation Update. In the March issue, William C. Quackenbush (Advent Valuation Advisors), former chair of the ASA's business valuation committee, presents a follow-up article to Matthews and Patterson.

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FASB issues new lease standard; veers from IASB

U.S. companies will be required to add leases to their balance sheets under an overhaul of the lease accounting rules by the FASB. Accounting Standards Update (ASU) No. 2016-02, Leases, will apply to both capital (aka finance) and operating leases. Up to now, GAAP has required only capital leases to be recognized on lessee balance sheets.

Key impact: Lessees will be required to recognize the value of assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. While a company’s book value isn’t likely to change significantly under the new rule, some financial ratios (e.g., return on assets) could be affected because companies will appear more leveraged.

As under current GAAP, the accounting for a lease primarily will depend on its classification as a capital or operating lease: For capital leases, lessees will recognize amortization of the right-of-use asset separately from interest on the lease liability. For operating leases, lessees will recognize a single total lease expense.

Out of synch: The International Accounting Standards Board (IASB) also recently issued a final lease standard (IFRS 16, Leases) that will require companies to bring leases onto the balance sheet. In the January 27 issue of BVWire, we reported that it would not be fully converged with the FASB standard, which is how it panned out. The IASB and FASB agree on many points, including the requirement that all leases of more than 12 months be recognized on lessee balance sheets. But they diverge in some respects, including lease classification. The FASB standard uses a dual-reporting model for lessees, while the IASB standard uses a single-classification model that requires lessees to account for all leases as capital (finance) leases.

The FASB standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application will be permitted for all organizations.

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Data needed to test new average-strike put option DLOM model

In response to user comments about limitations of his average-strike put option DLOM model, John Finnerty (Alix Partners) has developed a new version that can be generalized to accommodate a restriction period of any particular fixed length. He recommends that his old model be used for restriction periods of up to one year, but his new version should be used for restriction periods of more than two years (either model can be used for periods of one to two years). Finnerty also developed an extension of the new model that will accommodate situations where the length of the restriction period is uncertain, as, for example, when it is unclear when a private company might achieve a liquidity event.

Data needed: Finnerty presented the new model during a BVR webinar and asked the audience for comments and suggestions. He would also like some real data for testing purposes. “If anybody has a sample of private company data, I would love to test this model,” he says. Anyone who provides the data will be listed as a co-author of the paper Finnerty writes on the new model, but, he says, “I’ll do all the work.”

You can contact Finnerty at jfinnerty@alixpartners.com. His webinar, Discount for Lack of Marketability for Any Restriction Period— Mastering the Average-Strike Put Option DLOM Model, can be acquired if you click here.

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Physician compensation myth debunked

In a recent article in AIS Health Business Daily, Mark O. Dietrich (Mark O. Dietrich, CPA, PC) and Timothy Smith (Ankura Consulting Group LLC) refute conventional wisdom that says that if hospitals don’t pay their physicians at least the median compensation for their specialty, they will relocate to earn more money. Dietrich and Smith say that median pay, as determined by national compensation surveys, is perceived as the magic number for hospitals to employ physicians—even though there are better ways to pay physicians that pose less risk of fraud and abuse, they say.

“Established physicians relocating to earn the median flies in the face of common sense,” says Dietrich, editor of the upcoming fourth edition of the BVR/AHLA Guide to Healthcare Industry Finance and Valuation. Yet “it’s the mantra everyone believes,” adds Smith, co-editor of the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.

Better way: Instead of paying physicians the median compensation (i.e., the 50th percentile based on their work relative value units (wRVUs), a percentage of their collections, or a salary), hospitals could set fair market value compensation based on the resource-based relative value scale (RBRVS), they say. This could reduce or eliminate losses on physician practices, which put hospitals in the crosshairs of False Claims Act (FCA) lawsuits, according to Smith and Dietrich. The government has been winning these cases and reaping hundreds of millions of dollars in fines against hospitals.However, this new way to compensate physicians will require a different mindset and a willingness to rethink compensation surveys, they say.

Dietrich will present a session at the AICPA/AAML National Conference on Divorce on May 19-20 in New Orleans. For more information, click here.

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AICPA seeks QC honcho for new fair value credential

The AICPA is recruiting for the position of Quality Control Manager – Valuation (Fair Value) whose job it will be to make sure that individuals who hold the new credential in fair value measurement are performing their work up to par. This is part of the BV profession’s overall quality initiative with respect to fair value measurements.

The AICPA, ASA, and RICS will issue the new fair value credential under a common framework, but the individual will be bound by the issuing group’s professional and ethics standards. It will be rolled out this year in two phases: one for business and intangibles and one for financial instruments.

Stay current: An update on the new credential as well as all things fair value will be covered at the upcoming AICPA Fair Value Measurement Workshop to be held in New York City on March 21-22. Mark Zyla (Acuitas) tells BVWire that, in addition to the new credentialing initiative, he will cover current fair value developments regarding the Private Company Council (PCC), latest SEC and PCAOB regulatory matters, and the future of fair value for financial reporting.

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Explore an empirical method to isolate passive appreciation

A stumbling block in splitting out active versus passive appreciation of business assets in a divorce context is determining the method to use. Ashok Abbott (West Virginia University) has written a new paper that presents an initial exploration of economic environment determinants of business performance, which illustrate that the passive component of business performance is very significant.

Data analysis: In his research, Abbott provides practice-ready examples across several industries. One industry he analyzes is the grocery business. In examining economic data from 1992 to 2014, Abbott finds that there is a very significant relationship between the level of growth in population and the level of inflation and sales of groceries. Income, interest, and debt service levels do not appear to have a significant impact on grocery consumption. His analysis shows the aggregate impact of changes in population and inflation level accounts for 88.38% of the change in grocery sales. Of course, this is significant information if you’re valuing a grocery business caught up in a divorce.

Abbott will explain his methodology in an upcoming webinar, Active and Passive Appreciation: An Empirical Method for More Accurate Determination, on March 8.

Test your BV IQ: Are you up on the issues surrounding active versus passive appreciation? Find out by taking this short quiz now.

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Global BV news: BV environment heats up in Saudi Arabia “Competitive and evolving.” That’s how Faisal Alsayrafi describes the environment for business valuation in Saudi Arabia. Alsayrafi is founder, president, and CEO of Financial Transaction House (FTH), a corporate finance advisory firm in Saudi Arabia that offers a wide range of corporate finance advisory services to a diversified client base in the Middle East. The firm’s market area includes Saudi Arabia, UAE, Qatar, Bahrain, Kuwait, Oman (GCC countries), and Egypt. In an interview in the March issue of Business Valuation Update, Alsayrafi talks about the nature of the typical valuation engagement in his part of the world. “The engagements range from valuations for financial reporting, goodwill impairment to buy/sell side engagements (for business and machinery and equipment),” he says. In terms of growth areas, Alsayrafi says there is a growing interest in intellectual property and the valuation of IP assets. Also on the upswing are valuations of machinery and equipment in connection with purchase price allocations. back to top

BV movers . . .

People: Ted Gregory, who formerly served as Linton Shafer Warfield & Garrett managing principal 15 years ago, recently rejoined the Maryland firm as principal to lead the business valuation and accounting services practices out of the Frederick office, according to a news release … Danny Pannese has joined the West Hartford, Conn., advisory firm, Brentmore Valuation Advisors, as a valuation consultant … Randall Paulikens has joined the Friedman LLP as a partner in the forensic accounting, litigation support, and valuation services practice and will work out of the firm’s New York City and East Hanover, N.J., offices.

Firms: The Syracuse firm Bowers & Co. merged with Caswell & Associates and welcomes Brian Caswell to the firm as council … The Atlanta-based Habif, Arogeti and Wynne has joined global accounting association Morison KSi.

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March CPE events

Active and Passive Appreciation: An Empirical Method for a More Accurate Determination (March 8), with Ashok Abbott (West Virginia University).

Valuation in Divorce Litigation: Winning Clients and Testifying in Court (March 15), with Melissa Gragg (BDO USA) and Kristin Zurek (Cordell & Cordell).

Forecasts and Projections for Small Companies (March 17), with George Levie.

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist bvreducation@bvresources.com.

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at: info@bvresources.com.