New FASB proposed amendments to 141, 142, and 144
Just last week the Financial Accounting Standards Board released its Proposed FASB Staff Position amending Statements No. 141 (Business Combinations) No. 142 (Goodwill and Other Intangible Assets), and No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). This new FSP will “clarify the guidance on fair value measurements…in those Statements,” and will be effective until the adoption of FASB Statement No. 157, Fair Value Measurement. (See BVWire #48-3).
The FSP focuses on the “diversity in practice” in using entity-specific assumptions (rather than marketplace participant assumptions) in fair value measurements of non-financial assets. During its finalization of SFAS 157, the Board identified “certain wording in Statements 141, 142, and 144 that may have contributed to this diversity,” and proposed the FSP interim measure. The effective date would apply to fiscal years beginning after December 15, 2006, through the adoption of SFAS 157; three Board members originally objected to the FSP—and the Board is currently soliciting written comments that identify specific problems and offer “reasoned” solutions. Comment deadline is November 22, 2006; click here for the full text of the FSP.
BVR’s Firm Economics survey is shaping up to be biggest ever
To date, over 400 respondents have participated in BVR’s 2007 Report on Business Valuation Firm Economics & Best Practices, making it the largest survey of the business valuation profession that we know of. Don’t miss the chance to make your data count—and receive a free copy of summary results, plus $100 savings on the full survey results. (Due to the overwhelming survey response, the special discount pricing has been extended to November 15, 2006.)
To participate, click here.
We’ve come a long way from Ibbotsons—but are we there yet?
The development of defensible discount and capitalization rates continues to bedevil business valuators. Which data should you use: Ibbotson’s SBBI or Duff and Phelps’ Risk Premium Report—or both? Or some other source—such as Fama/French data? (See BVWire 47-2).
And what about supply-side Equity Risk Premium—should you use it or not? Why did the premium difference drop from 1.25% to 0.8%? And growth rates: Should you use 0%, 3%, 6%--or more? And as for Ibbotson’s industry risk premiums, a beta by any other database might not be as sweet—but also might not go far enough, alone, to carry the day in court.
For the answers to these and more on discount/cap rates, tune into top-notch panelists Gary Trugman, Jim Hitchner, Jim Alerding and Chris Mercer at the BVR telephone conference on November 8, 2006; to register, click here.
Still more controversy spins off from Dallas
“In its ruling, the [Dallas v. Commissioner] court disagreed with certain elements of MPI’s valuation methodology,” writes Harry L. Curtis III, president of Management Planning, Inc. (Princeton, N.J.), in Steve Leimberg’s Estate Planning Email Newsletter #1042 (Oct. 23, 2006) at www.leimbergservices.com. “First is an assertion …that we copied passages of another consultant’s report verbatim. We totally reject that implication—it’s simply not true.” MPI came onto the case four years after the first appraiser, Curtis says, and used only the latter’s business description for its factual review of the company’s operations, after holding extensive management meetings to confirm the facts as well as unearth new information.
As to the second criticism, although MPI agrees that its appraiser’s court testimony “was not up to the high standards we are known for,” it attributes the lapse to a “seminal manifestation of a health condition,” which led to the appraiser’s early retirement last spring. Curtis also clarifies MPI’s position on tax-affecting, DLOM, voting control premium, and executive compensation “add-backs.”
Also commenting on the Dallas case: Owen Fiore, JD—who was just released from federal custody after serving 16 months for income tax evasion (see www.owenfiore.com). Both of these blogs beg the question: When does the commentator become more controversial than the court case? Email your reaction/responses to the BVWire editor.
When ‘fair market value’ includes synergies
Most business appraisers can recite the hornbook definition of “fair market value” by heart (the price at which property would change hands between a willing buyer and seller, neither under a compulsion and both with reasonable knowledge of the relevant facts). But—“what is the definition of a willing buyer?” asks Jay Fishman in BVR's telephone conference last week on “Standards of Value” (with Shannon Pratt, William Morrison, and moderator Ron Seigneur).
“Is it a group of buyers? Is it a pool of buyers? Is it one buyer? We used to think that fair market value does not entail synergies,” Fishman adds, and generally, this remains true regarding synergies unavailable to most buyers. But: “There’s a case called BTR Dunlop where the Tax Court actually indicated that you should look at the pool of willing buyers.” In that case, there were six of them, each bringing a synergy that became relevant in determining fair market value.
For a free copy of the 1999 BTR Dunlop from the BVLaw™ database, case, click here; for a copy of Standards of Value: Theory and Applications, from co-authors Fishman, Morrison, and Pratt—including a 15% price discount, originally offered at the telephone conference—click here.
Pricing liquidity and managing corporate bias: two new working papers from HBS
In its latest blast to business leaders, Harvard Business School asks “why is it so difficult for companies to estimate with some degree of accuracy their sales and operation needs more than a year out?” Built-in biases cloud corporate forecasters’ judgment, says a new working paper that studies supply-chain forecasting and analyses consensus forecasting in an electronics firm; to read the article abstract, with links to the full-text, go here.
A second HBS working paper researches the notion of liquidity as a transaction cost/performance measure of market structure. “In real world capital markets, investors and corporations generally do not expect to transact at fundamental value. Rather, market participants face some degree of illiquidity, where they must sacrifice price, trade size, or speed of execution. For more, click here.
These two topics couldn’t be more timely: At the sold-out CICBV/ASA Business Valuation conference in Toronto last month, Ashok Abbott, MBA, Ph.D. (West Virginia University) presented the latest data on liquidity in asset pricing to the 700+ attendees. In another plenary session, fellow academic Teri Lombardi-Yohn, Ph.D. (University of Massachusetts) offered current research to verify and test the inputs and projections used in management-prepared forecasts. Look for BV-specific articles on both topics in the next Business Valuation Update™. To subscribe, click here.
What becomes a BV legend most?
Legends in the rock music industry release “best of” compilations and become inducted to the Hall of Fame. And while the comparable may not be precise, in business valuation, the “legendary” Shannon Pratt has just released The Best of Shannon Pratt (BVR, 2006), a compilation of his articles over the past decade from the BVU and Judges and Lawyers™, on topics ranging from the cost of capital to discounts for lack of marketability, opinions on controversial court cases to reflections on trends in the BV profession. To order a copy, including a limited-time $50 savings, click here.
And just this month, the Financial Consulting Group announced that Dr. Pratt’s firm, Shannon Pratt Valuations, LLC (Portland, OR) has joined its invitation-only ranks, which now counts just over 100 members, including recent inductees Cordes & Company, Inc. (Denver), Reed Tinsley, CPA (Houston), Advent Valuation Advisors, LLC (Newburgh, NY), Daszkal Bolton, LLP (Boca Raton), and Harper Lutz Zuber Potenza & Associates (Denver). To be considered for membership, a firm must have at least one person with a valuation designation, complete an application and submit a report for review; rock ‘n roll experience optional. For more information, gofcg.org.
BVWire is six months old—and now fully searchable
It’s been just about six months since the release of the first BVWire™, and to celebrate, we’ve made the weekly e-newsletter’s archives completely searchable, going all the way back to its original inception as BVR’s E-Update (January 2006). Just scroll back up to the top right hand margin, enter your search term(s), and let the Google-powered engine do the rest.
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