‘Free-for-all’ on BV standards leads to serious comment
How relevant is financial reporting to business valuation professionals? Should there be one set of BV standards for all—or possibly two sets of standards, one covering “financial reporting” and another that covers “all other” valuation work? Is there a difference between “standards” and “best practices”? What authority is best qualified to issue standards for the BV profession? And what about convergence with international standards?
These are just some of the provocative questions asked by co-presenters Bruce Bingham and Carla Glass at the ASA BV Conference in San Diego last week. Bingham, current Chair of the IVSC team that’s developing a discussion paper on intangible asset valuation, and Glass, who just finished serving a six-year term as the sole BV representative on the Appraisal Standards Board, billed their session as a standards “free-for-all,” and were even willing to endure a possible “food fight.” But, “rather than just stir the pot,” Bingham said, “we’d like to put up these questions for your serious consideration and comment.”
One of the first questions: How many ASA attendees prefer the “old-fashioned” definition of fair market value? (The vast majority raised their hands.) How many prefer the FASB/financial reporting definition of fair value? (Two hands raised.) And yet, when asked if there should be one set of “united” BV standards, just over half of attendees raised their hands, while slightly less than half supported two sets of standards, one governing valuation for financial reporting and a second for “all other” BV work. Several individuals also braved the microphone to deliver their thoughtful if disparate views on this important topic.
Clarifying picture. At the end of the session, Bingham and Glass presented a diagram to help clarify the issues—but understandably, they want the diagram to appear within the entire context of their remarks on possible sources for BV standards, implementation, and enforcement. We’ll feature a full write-up in the next issue of the Business Valuation Update™. We’ll also continue to offer the BVWire™ as an open forum for discussion—so please email any comments and ideas to the editor.
Sole BV member of ASB asked to resign
At one point during the same ASA session, a member of the audience “took exception” to the suggestion that service on the Appraisal Standards Board (ASB) might be one way to approach the standards dilemma, noting that a “member of his firm”—and the sole BV member of the ASB—was recently asked to resign. The speaker did not elaborate, but his tone implied an affront as well as a general exception. In post-conference follow-up, Noreen Dornenburg— appointed in October 2006 to serve as Vice Chair of the ASB for a three-year term—confirmed that she was indeed asked to resign from the Board, “for personal reasons,” she said. The Appraisal Foundation has yet to issue any public comment or notice of the vacancy (in fact, Dornenburg is still listed as a member of the 2007 ASB at the website.) BVWire asked a member of TAF’s Board of Trustees to comment, but has not yet received a response. Next Month's BVU will also feature Dornenburg's overview of the standards "quagmire," along with her insights into possible solutions.
Fifty years of S Corp tax policy ‘turned on its head’
Last month, Chairman Charles Rangel (D-NY) of the U.S. House Ways and Means Committee introduced legislation that “turns fifty years of tax policy on its head,” according to the S Corporation Association’s Washington Wire (see October 29, 2007). The “Tax Reduction and Reform Act of 2007” would lower the corporate tax rate and the individual alternative minimum tax (AMT). “However, one of the many revenue increases…is a provision that would raise $9.5 billion over ten years by expanding the application of payroll taxes on S corporation shareholders who also work at the business.” Service businesses would be the primary focus on the new tax. “But nonetheless, it represents a payroll tax increase on taxpayers that are already fully complying with the law,” warns the S Corp Wire, “setting the state for future efforts to apply payroll taxes to all S corporations.”
Tax policy is just one critical topic. “The talk of tax reform certainly has some interesting implications for the whole S Corp debate,” says Nancy Fannon, author of Fannon’s Guide to the Valuation of Subchapter S Corporations, available at BVResources. “With proposals for both increasing the rate on dividends and lowering the rate on corporations in the air, it could be an interesting year.”
Potential shifts in federal tax policy will be just one among many valuation topics that Fannon will cover in next week’s (Tuesday, November 13, 2007) telephone conference on S corporations. Notably, she will discuss the traditional methods of valuing pass-through entities and the new “Simplified Model,” which cuts away the complexity and streamlines the calculations. To give you an idea: A comparative summary of the currrent models—including those used by the Tax Court and the Delaware Chancery Court—is available here. Sign up for the teleconference now, and receive a $100 discount on the purchase price of Fannon’s Guide. To register, click here.
IRS issues definition of ‘death’ under 409A (NOT)
“This notice provides additional guidance on the application of a service recipient’s death under § 409A of the Internal Revenue Code to nonqualified deferred compensation plans,” says the preamble to “Notice” 2007-90. This supposed guidance includes:
- A more precise definition of death (also known as “separation from life”).
- Presumptions the Service will apply in determining if a service recipient has experienced a separation from life under § 409A.
- Examples detailing situations that the help illustrate the Treasury’s position on separation from life—including the following:
Pete uses 5% of his brain and 50% of his body on a daily basis. Pete has struck a deal with the devil such that, in exchange for his soul, Pete retains the right to regain life after the first two times that he would otherwise separate from life. Pete gets mauled by a cougar and is not performing any mental and bodily functions for more than 10 minutes. However, because Pete retains the right to regain life, he has not experienced a separation from life.
Obviously, the “Notice” is an Internet spoof, spawned from some tax bloggers with a bit too much time on their hands this Halloween; read their humorous take on 409A here. The “real” Notice 2007-90 was issued last week, alerting taxpayers, tax practitioners, and “other persons who represent estates” that the IRS has changed its policy and “will now determine on a case-by-case basis whether security will be required” for estates that elect to defer applicable tax for closely held businesses under IRC § 6166. The change resulted from the Tax Court’s ruling earlier this year in Estate of Roski (April 12, 2007). To read the “real” Notice 2007-90, click here.
Special track on the ‘real’ 409A
The National Summit on Fair Value for Financial Reporting, co-sponsored by BVResources and the ASA on February 5-6, 2008 in New York City, will feature a special, half-day track on valuing stock options to meet the compliance guidelines of both IRC § 409A and SFAS 123R. Valuation of common stock using both PWERM and option pricing models—including determining key inputs and binomial option analysis—are on the agenda. And of course, sessions on financial reporting will include a panel of “Big Four” senior valuation partners (to get the auditor’s perspective) while another will feature CFO perspectives—and how to build a practice with this key client group. Register now for “early bird” pricing: click here.
ASA considers ‘joint unification’
According to an email update to its members last week, ASA leaders met yesterday in New Orleans with their counterparts from the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers for a joint board meeting. The purpose of the “historic gathering” was to review the “first draft of the initial phases of the plan for the unification of the valuation profession.” Similarly, in the current ASA Professional, W. David Snook writes that the “unification team…intends to present a framework of the unification proposal,” which “may change our future direction.” The ASA will make details of the plan available after the meeting.
Valuation Resource Group also to meet
The Valuation Resource Group (VRG)—formed this summer to provide the FASB with “alternative viewpoints” on implementing fair value for financial reporting—will meet on Friday, November 9, 2007. Because the VRG does not issue “authoritative decisions,” its meeting and minutes remain closed to the public. But if its October meeting offers any guidance, the VRG will continue to discuss concepts of “highest and best use,” an “active market,” and determination of “market participants.” These are basically “good concepts,” according to Bruce Bingham, who commented on SFAS 157 during his ASA BV conference session. “But some aspects [of fair value for financial reporting] defy common sense.” For a VRG project update, including its membership and meeting schedule, click here.