AICPA valuation conference draws a huge crowd
Over 1,100 attendees at the AICPA Forensic and Valuation Services Conference 2015 in Las Vegas heard some outstanding speakers and topics. BVWire was excited to be at the event, which included an update on AICPA matters related to the valuation profession.
Front-burner issues: The chair of the FVS executive committee, Carol Carden (PYA PC), updated attendees on several key issues the AICPA is monitoring. One is the forthcoming proposed regulations from the IRS that will put the kibosh on discounts for family limited partnerships (FLPs). This will have a “definite impact” on valuation, so a special AICPA panel will analyze the proposed rules when they are released. The AICPA is also submitting comments to The Appraisal Foundation (TAF) on the control premium (MPAP) exposure draft by the due date (November 30).
New college program: The chair of the BV committee, Randie Dial (CliftonLarsonAllen), mentioned the four valuation and forensic practice aids the AICPA issued during the past year (a “phenomenal accomplishment”): economic damages, estate/gift tax, fraud, and one for expert witnesses and consultants. He also spoke about a new college program being rolled out where students can take a valuation course that prepares them for the ABV exam, which they would take in two three-hour class sessions. If they pass, the students would have the ABV “on hold” until they get their CPA, at which point the ABV would kick in.
New FV credential: AICPA senior technical manager Eva Simpson gave an update of the new credentials to be issued for fair value. The new credential for fair value related to business and intangibles will roll out in spring 2016, and the new credential for financial instruments will launch in fall 2016. A draft of the mandatory performance framework will be issued for exposure in early 2016. The AICPA, ASA, and RICS will issue this new credential under a common framework, but the individual will be bound by the issuing group’s professional and ethics standards. It is unclear whether the new credential will be a new set of letters or some special mark added to a person’s existing BV credential, such as an asterisk or other symbol.
Here are some takeaways from a few of the other sessions:
The “D” in DCF is important, but most mistakes occur in forecasting the “CF,” says Professor Aswath Damodaran (New York University Stern School of Business), one of the keynote speakers. He feels that too much time is spent on figuring out a discount rate and too little time is spent on developing cash flows.
There was lots of interest over personal injury damages calculations. When doing them, ask for tax return transcripts from the IRS when determining lost earnings base—don’t simply rely on return copies you’re given, advises Holly Sharp (LaPorte CPAs & Business Advisors).
Statistics, particularly regression analysis on key business drivers, can be used to do the “but for” forecast for calculating lost profits, say Michael Crain (Financial Valuation Group) and G. William Kennedy (Berkeley Research Group LLC).
Over a third (39%) of experts would not accept a marijuana business for a valuation engagement, per a poll taken at a session on valuation issues in this industry conducted by Hilary Bricken (Harris Moure PLLC) and James Marty (Bridge West CPAs and Consultants LLC).
In the oil and gas area, mineral ownership is complex, so the definition of rights is key to the valuation, according to Edwin Moritz (Gustavson Associates).
At a session on ESOP valuations, Steven York (Stern Brothers Valuation Advisors) advised valuators to stay clean and have no secrets from the ESOP trustee.
Experts agree that if you don't fret the night before testimony you don't have a pulse, say panel members at a session moderated by Jason Flemmons (FTI Consulting).
During a session on cost of equity capital, the implied private company pricing line (IPCPL) was discussed. This is a newly developed tool that uses data from Pratt’s Stats and is designed to better estimate the cost of capital for a small private company. It’s not ready for court, but “get it, read it, and try it out—it may have some merit” says Ted Israel (Israel Frey Group LLP). For now, try using it as a sanity check alongside other methods.
There were a number of other sessions on cost of capital, which was interesting in light of Damodaran’s comments about too much time being spent on the discount rate. Of course, this has become a complex topic with a great deal of related research and data. One well-known valuation expert said: “It took me seven years to understand it.” At the end of the conference, one attendee told this editor: “I’m all cost of capital-ed out.”
Many more details on these topics are coming in the January 2016 issue of Business Valuation Update.
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Tax Court’s Judge Laro discusses hot topics in tax valuation
A highlight at the 2015 AICPA conference in Las Vegas was the session in which David Laro, senior judge of the United States Tax Court, shared some of his thoughts on hot valuation topics.
Tax affecting: Practitioners must know the IRS’s October 2014 job aid explaining the agency’s thinking on valuing S corporations. The IRS’s position of no tax affecting leans on Gross v. Commissioner and progeny but contradicts sound valuation practices, says Judge Laro. Keep in mind that Tax Court memos are not precedent, he reminds us. Therefore, “the final chapter on tax affecting has not yet been written.”
DLOM: Simply pulling the discount for lack of marketability rate from restricted stock studies and pre-IPO studies spells trouble, the judge cautions. Today’s Tax Court judges know valuation in a way the prior generation did not. And they expect experts to tailor their DLOM to the facts of a particular case. Judge Laro recommends using his Mandelbaum decision, in which he provides a multifactor analysis, as guidance for your DLOM determination.
USPAP: Mere compliance with the profession’s standards does not make you a reliable expert for Tax Court purposes, Judge Laro says. Conversely, failure to comply with the standards does not exclude your testimony from consideration.
Hot tubbing: This technique, also known as concurrent witness testimony, is Judge Laro’s preferred technique for receiving expert testimony. It replaces the blood sport of cross-examination with a collegial discussion involving the judge and the experts on both sides but excluding the attorneys. According to Judge Laro, when experts need not fear attacks on their credibility, they are able to express their thoughts more freely and provide the judge with a more meaningful valuation than the adversarial system allows. Not everyone is on board, but it’s a technique that is catching on. In fact, the AICPA is providing training in this technique.
Find out more about hot tubbing in Business Valuation Update’s June 2014 article “U.S. Tax Court Judge Laro Discusses Valuation and Expert Testimony Issues.” Also, a digest of Mandelbaum v. Commissioner, T.C. Memo 1995-255, along with Judge Laro’s opinion, is available at BVLaw.
More of Judge Laro’s remarks will be covered in the January 2016 issue of Business Valuation Update.
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Some eye-opening nuggets from the AICPA healthcare conference
Valuation in the ever-changing healthcare sector was front and center at the AICPA’s 2015 Healthcare Industry Conference in Las Vegas, where 375 attendees participated in some valuable sessions. BVWire was there, and here are just a few points of interest.
Mark O. Dietrich (Mark O. Dietrich, CPA, PC) presented a breakthrough new valuation method for determining the FMV of physician compensation. The method is designed to be more accurate than the current use of faulty survey data, which is “guaranteed to indicate a loss.” The existence of losses on doctors and acquired practices is the thrust of all the recent cases where the government says there’s fraud and violations of the Stark Law. The government has been winning these cases and reaping hundreds of millions of dollars in fines against hospitals. This new valuation method—if given the chance—could take the wind out of the government’s sails. You will have the chance to read more about this new method in early 2016 in the forthcoming BVR/AHLA Guide to Healthcare Finance and Valuation, 4th Edition.
Hospitals will see lower revenue from new off-campus outpatient departments under the federal budget bill that was passed November 2, several speakers declared. These facilities will get lower reimbursements under Medicare—but existing facilities are grandfathered, so they are not affected. The provision caught many people off guard.
Many healthcare valuators are surprised that retail healthcare is a huge financial concern—second only to changing reimbursement models—speakers said during a panel of healthcare CFOs moderated by Britt B. Tabor (Erlanger Health System). Retail healthcare facilities are the urgent care centers, Walmart and CVS clinics, and similar centers springing up. As patients become price-shopping consumers who are also looking for convenience, it’s a trend that’s growing, and it’s here to stay.
A new healthcare valuation practice area is emerging: conducting an independent analysis of “commercial reasonableness” for healthcare acquisitions. Recent court cases have imposed large fines on hospitals over this issue, says Jim Lloyd (Pershing Yoakley & Associates PC). One hospital scrapped a $20 million dollar deal after reading the valuator’s analysis.
Look for more joint ventures between for-profits and nonprofits in healthcare, according to attorney James Pinna (Hunton & Williams LLP), but there are valuation wrinkles due to the federal tax laws governing charities. For example, if the nonprofit’s valuable brand name is contributed to the venture, it must be valued and an adequate return must be earned. Otherwise, it could be seen as a private interest reaping the benefit from a charitable asset, which is taboo.
There was some cocktail party chatter about a $28 million settlement just paid by a New Jersey nonprofit hospital that lost its property tax exemption over a number of different issues, including unreasonable compensation of executives and questionable contracts with for-profit physicians. Experts say it could trigger similar actions from cash-strapped municipalities and possibly spark challenges to tax-exempt status from the IRS.
The January 2016 issue of Business Valuation Update will have details on these—and other—valuation matters in healthcare.
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Common valuation errors covered at NACVA’s Fort Lauderdale event on December 6-9
The NACVA conference in Fort Lauderdale, Fla., on December 6-9 will have five tracks: business valuation, healthcare valuation, forensics, M&As, and transaction advisory services. One of the sessions will be on common errors in valuation.
Boost defensibility: “The aim of the presentation is to give attendees insight into common issues that we have seen in valuation reports we have reviewed over the years,” says Sean R. Saari (Skoda Minotti), who will conduct the session. “Armed with the knowledge of these common errors, we hope that practitioners are able to review their reports/templates and identify ways to make their conclusions more defensible in the face of scrutiny from opposing experts.”
One of the common errors Saari will cover is the confusion of equity value and enterprise value. “Valuation multiples applied in the market approach are typically based on, and provide an indication of, a company’s enterprise value, not its equity value,” he says. “The expert needs to subtract the company’s debt and add its cash balance to its enterprise value in order to reach an equity value. If these adjustments are not made, the concluded value is not likely to be accurate and is subject to attack.
Special offer: BVR has arranged with NACVA for a special offer for attendees to this conference. For more information and registration details, click here.
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Global BV news:
TAQEEM taking BV beyond Saudi Arabia
In Saudi Arabia, the Law of Accredited Valuers was issued in 2012, which led to the formation of the Saudi Authority for Accredited Valuers, known as TAQEEM. This is a nonprofit authority with an independent budget that is supervised by the Ministry of Commerce and Industry. It is the government regulator for business valuations in Saudi Arabia.
Ray Moran (MG Valuation LLC) recently interviewed Soltan Aljorais, a TAQEEM vice president, and asked how the organization plans to serve valuers in other Arabic-speaking countries. “We already translated the International Valuation Standards (IVS) to the Arabic language and we are enhancing the translation every year,” says Aljorais. “The Arabic-translated IVS is already published on the TAQEEM website. In 2016 we will introduce, with the IIBV, some business valuation courses in Arabic-speaking countries.”
TAQEEM is a member of the International Institute of Business Valuers (IIBV), an umbrella organization of business valuation professional organizations that promotes the sharing of best practices in business valuation through its program of education courses delivered globally. Other members include the American Society of Appraisers, the Canadian Institute of Chartered Business Valuators, and the China Appraisal Society.
You can read the full interview in the December 2015 issue of Business Valuation Update.
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Preview of the December issue of Business Valuation Update
BV conference season is in full swing, so this issue has several reports from events in the U.S. and around the globe.
- Monte Carlo in BV: A Valuable Tool … in the Right Circumstances (BVR Editor). Sessions at all the major BV conferences this season examined how and when to use Monte Carlo to analyze how uncertainties influence value conclusions. BVR’s exclusive survey reveals who’s using it and in what circumstances.
- Highlights From the 2015 ASA Advanced BV Conference (BVR Editor). Valuation experts hit the jackpot in Las Vegas at the ASA’s annual event. There were some great sessions that offered some practical advice for a wide variety of valuation issues, from estate and gift tax audits to valuing complex equity.
- Interview With Soltan Aljorais From TAQEEM, the Saudi Authority of Accredited Valuers. Ray Moran, CEO of MG Valuation LLC, talks with Soltan Aljorais, a vice president of TAQEEM, a government regulator for business valuations in Saudi Arabia.
- Are International Standards for Intangible Assets Adapted to Most Companies? (Charles Markowicz, CPA, Belgium). This article examines the International Financial Reporting Standards (IFRS) and International Accounting Standard IAS 38, which deals with intangible assets—and Section 18 in particular, which is applicable to small and medium-sized enterprises, known as SMEs.
- Recap of The Appraisal Foundation’s Business Valuation Roundtable III (David S. Bunton). The president of The Appraisal Foundation provides an overview of this important event that demonstrates that global cooperation in the BV profession is becoming a reality.
- IVSC Meeting in Paris Reveals a Global Perspective on BV (BVR Editor). Insights and perceptions from valuators around the globe who attended the International Valuation Standards Council (IVSC) annual meeting in Paris.
- BVU Profile: Two-Year IRS Nightmare Caps Off Long Valuation Career (BVR Editor). An interview with Alfred M. King (King Valuation Services LLP) who started his BV career at American Appraisal in 1969. He went through an incredible ordeal with the IRS that can happen to anyone today.
- Study Reveals DCF Usage by Top M&A Practitioners (BVR Editor). Major investment banks routinely use DCF techniques to determine company value for M&A purposes, but it is “far from routine,” say the authors of a recent study.
- New Features: Ask the Experts and Tip of the Month. Valuation experts answer puzzling questions and give some practical advice on a wide variety of topics.
To read these articles—as well as digests of the latest court cases—see the December issue of Business Valuation Update (subscription required).
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BV movers . . .
People: Samar Obaid, transaction advisory services partner at Ernst & Young in Jordan, has been named as the winner of this year’s “Best Global Initiative for Women’s Economic Empowerment Award” at the Global Women in Leadership Achievement Awards 2015 in Dubai … Dave Stende has been unanimously re-elected as managing partner/CEO of Eide Bailly, and Laura Srisch and Brian Callahan were elected as the newest members of the firm's board of directors.
Firms: Anton Collins Mitchell of Denver is merging with the 35-year old Laramie, Wyo., firm Mader Tschacher Peterson on Jan. 1, 2016 ... BDO Canada acquired H&A Forensic Accounting, a Toronto-based advisory and professional forensic accounting firm. Additionally, BDO Canada has merged with Majewski Shaler & Co., a Vancouver-based accounting practice that services small and midsize enterprises, particularly medical, engineering, commercial real estate, and technology businesses … BDO USA has expanded its San Diego-area practice by adding CEA LLP in Carlsbad, Calif. … Eide Bailly announced it is acquiring the Billings, Mont., firm Schafer & Associates PC, on Dec. 14, expanding Eide Bailly to 1,600 staff members across 12 states working out of 27 offices ... Elliott Davis Decosimo and the Franklin, Tenn., firm Crowell & Crowell will merge their firms effective Jan. 1, 2016.
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CPE events include ‘treasonable’ compensation
Treasonable Compensation? The Continued Misapplication of the Excess Earnings Method (November 19), with Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC) and Ronald Seigneur (Seigneur Gustafson LLP).
Valuing Brand Names (December 10), with Chris Mellen (Valuation Research Corp.) and PJ Patel (Valuation Research Corp.). This is Part 8 of BVR's 2015 Special Series on Intellectual Property.
Expert Insights: Q&A with Ron Seigneur (December 16), with R. James Alerding (Alerding Consulting LLC) and Ronald Seigneur (Seigneur Gustafson LLP).
Valuation of Complex Financial Instruments in the Energy Sector (December 17), with Matthew Goldberg (BDO), Ernie de Lachica (BDO), and Pablo Alfaro (BDO).
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BVWire will be taking a break to enjoy the U.S. Thanksgiving holiday next week. We will resume publication on Wednesday, December 2. We wish you a very happy holiday.
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