October 10, 2012 | Issue #121-2  

Will there be a ‘PCAOB’ for the
valuation profession?

Remember when the SEC’s Paul Beswick made a public call for unifying the valuation profession under one set of credentials and standards? That speech last December “really slammed the profession,” said Steve Sherman (KPMG), who spoke to the opening session at the American Society of Appraisers’ 2012 BV Conference in Phoenix this week.

The speech also reflected a trend or “at least a hope” among SEC and other regulators that the valuation profession will start to “coalesce” around a single set of qualifications, standards, body of knowledge, and yes, even oversight, added co-presenter Anthony Aaron (Ernst & Young). Whether or when that will happen, as a voluntary “self-policing” effort or otherwise, neither Aaron nor Sherwin would hazard a prediction. What they agreed on: “When we have something like a Beswick speech,” Aaron said, “we have to pay attention and ask ourselves, ‘What do we do to make this better?’”

In that respect, Aaron reminded ASA attendees that The Appraisal Foundation (TAF)—for which he sits on the board of trustees—held a roundtable last spring to help foster greater communication and coordination among the BV professional organizations, as well as their constituents, so that “together, in the eyes of the regulators, we won’t have—as Jay Fishman calls it—‘tribal warfare.’”

Similarly, Sherman—who currently chairs the International Valuation Standards Board—noted that almost every U.S.-based valuation organization reached out to Beswick, expressing the hope that any future speech will reflect “meaningful, substantive change” from valuators. If not, Sherman fully expects the regulatory environment to tighten and raise the bar even higher for the valuation profession—perhaps by involving a valuation oversight board.

“Will there be a ‘PCAOB’ for the valuation profession?” Aaron asked. “If we fail to heal ourselves, then that could very well be.” In the meantime, “We want to be part of the solution, not the problem,” he said, noting TAF will be publishing a white paper on its spring roundtable soon. For his part, Sherman lauded the appointment of Sir David Tweedie as chair-elect to the IVSC’s board of trustees. Under Tweedie’s leadership, the IVSC is certain to be “a catalyst for the greater good of the profession.”

More push for valuation to become a ‘global profession,’ from IVSC

Sure enough, during the ASA’s second general sessions in Phoenix, Roel Campos, former SEC commissioner and current acting chair of the IVSC’s board of trustees, noted the impact of Beswick’s speech and the need for the valuation profession to show progress on a broad level—for example, by working toward a particular set of standards or a consistent plan to work with auditors. “That’s the carrot approach,” Campos said. The stick: “If valuations continue to be [perceived] as a problem,” particularly those for public companies, then “the SEC could entertain the idea of creating a national oversight body along the lines of PCAOB.” Campos doesn’t support the idea. “I’d like to see the valuation organizations come together and make it unnecessary,” he said. But again, “if we don’t do anything to improve the consistency of valuation then we could end up with an oversight board, and we might not like the consequences.”

At the same time, as one ASA attendee put it: “We have valuation standards coming out of our ears.” As a result, enforcement—what to enforce and how—is another pressing problem. “You’re right,” Campos agreed. The valuation community shouldn’t been seen as the “Wild West,” he said. “You’re not a profession unless you have an enforcement mechanism that works.” Self-policing didn’t work in the accounting world after the Enron and WorldCom scandals. “At the end of the day, we have to make folks accountable,” Campos said. The IVSC’s objective is not to displace any organization, but to build trust among valuation professionals and the public. “Our desire is … to put forward the idea of a global profession of valuators,” along the lines of what the accounting and auditing professions have achieved. “We haven’t gotten there yet,” he said, but by next year’s ASA meeting, the IVSC would ideally like to have a substantive work plan in place, developed in cooperation with organizations such as the ASA, TAF, RICS, CICBV, and, of course, their members.

For ‘real-time’ reports from the ASA, check out the BVWire News, where we’re posting reports directly from ASA sessions on industry updates, litigation strategy for valuation experts, and more.

Arizona court rejects ‘realizable benefit’ approach to valuing professional practice goodwill

Calling it “the most intangible of intangibles,” the Arizona Court of Appeals acknowledged the “difficult task” of valuing professional practice goodwill (even in a state that applies the minority rule, accepting all goodwill as marital property without having to distinguish its personal/enterprise components). But did its new decision last week—which surveyed several states in considering whether to adopt the majority standard—help simplify the task?

At trial, the expert for the husband—who directed the litigation department of a national law firm in its Phoenix office—limited his interest to the $140,000 return of capital per the firm’s stock redemption agreement. By contrast, the wife’s expert—who used a capitalization of earnings approach—said it was worth closer to $1.3 million, including goodwill. Applying a “realizable benefits” standard, the trial court found the buy-sell restricted the value, “goodwill or otherwise,” to $140,000 and rejected anything else as “mere speculation.”

On review, the appellate court ruled this was wrong. Goodwill value doesn’t have to be “realizable,” it said, i.e., something “that can be bought and sold on the open market.” At the same time, goodwill cannot include a professional’s future earning capacity, per se, but only its “enhancement” through reputation, client patronage, and the firm’s “platform.” Notably, expert testimony can “help guide the court” in separating earning capacity from intangible values, but the appellate court declined to clarify (or complicate?) the expert’s task by adopting the majority rule and remanded the case for a reconsideration of value under its broad “equitable” standard.

What do you think? We’ll have the complete digest of Walsh v. Walsh, 1 CA-CV 11-0269 (Oct. 2, 2012) in the December Business Valuation Update. In the meantime, we’ve just posted the court’s opinion at our free downloads page. What does the decision add to the body of law on goodwill values in divorce? Please email your thoughts to the editor. (Note: Our thanks to Lynton Kotzin, of Kotzin Valuation Partners, who was teaching the ASA’s BV201 course in Phoenix last week and alerted us to Walsh.)

Tax affecting: still no consensus among appraisers, IRS examiners, and the courts

The most notable thing about the valuation of pass-through entities (PTEs) may be … that there’s nothing new to note, says Nancy Fannon (Meyers, Harrison & Pia). Has the IRS backed off its historic resistance to tax affecting the income stream of S corporations and similar PTEs to account for the difference between the public market data, from which they derive the cost of capital, and the subject PTE, to which they will apply it?

“I've been told yes, but the cases I've been called on indicate otherwise,” says Fannon. “Next to discounts for lack of marketability, there may be no issue more material to the valuation of a closely held company than tax affecting, yet I find there is an utter lack of consensus among professional business appraisers on what to do, leaving potentially widely disparate results from one practitioner to the next.” As a result, courts appeared more confused than ever: Consider the recent Bernier opinion from the Massachusetts Supreme Court, which just remanded a protracted divorce case back to the trial court for a third try at correctly applying the Kessler metric on tax affecting.

Get current on research, court cases, and credible solutions. Join Fannon and Keith Sellers (University of Denver) on October 18 for The Latest on S-Corps: Practical Lessons from Research and the Trenches to arm your appraisals of closely held companies with the latest academic conclusions and practical applications.

ASA BV committee warns against ‘unintended consequences’ of proposed USPAP revisions

The ASA’s BV committee has just submitted its comments on the Second Exposure Draft of the 2014-2015 version of USPAP to the Appraisal Standards Board (ASB), in particular, the proposed redefinition of “assignment results” to include aspects other than a “final opinion of value.” As the BVC’s letter explains:

Other aspects of the assignment may represent important factors in the final opinion of value, but they are not “assignment results” in their own right. While the proposed definition is a step in the right direction from the initial proposed change that included interim appraisal analyses, there are too many ways that other aspects of an assignment could be construed as something more than relevant in the context that they support a final opinion of value.

For example, the proposal might have “a possible unintended consequence” in litigation-related assignments, the BVC says. Contrary to the emerging trend in federal litigation that precludes appraisals from discovery, the broader definition of “assignment results” could elevate an interim analysis or calculation to the status of a final (and discoverable) opinion of value. Accordingly—should the ASB go ahead with the revision—“we request that you consider creating a litigation exception.” To read the BVC’s complete four-page letter, click here.

Still time to second the recommendation. The current exposure draft is an improvement over the initial proposal, notes Linda Trugman, chair of the BVC, “perhaps because of our many responses.” There’s still time to participate in the standards process by endorsing the BVC’s letter, Trugman says. Although the deadline for stand-alone comments was October 5, she believes the ASB will still consider endorsements of the BVC’s letter.

After losing ground in FLPs, the IRS is still fighting defined-value clauses

The 5th Circuit’s recent ratification of substantial valuation discounts applied to a family limited partnership (FLP) in Keller v. United States teaches some valuable lessons, said attorney John Porter (Baker Botts), in part I of BVR’s Online Symposium on Estate and Gift Tax. Specifically, it’s never too late to start the estate planning process. Even if the formation is incomplete by the time of the decedent’s death, the partnership may still exist under applicable state laws, sufficient to preserve its discounted asset values. To make sure, Porter said, “it is critical that estate planners—lawyers and appraisers—document the transferor’s intentions and all steps taken to effect the partnership formation and funding diligently.”

Another issue that bears a close watch: Even though the Tax Court “resoundingly” rejected the IRS’s arguments against asset transfers using defined-value clauses in Wandry v. Commissioner, the agency has taken the case to the U.S. Court of Appeals for the 10th Circuit. Stay tuned …

And save the date. Join William Frazier (HFBE) and Ashok Abbott (Business Valuation, LLC) on November 8 for Part II of BVR’s Online Symposium on Estate and Gift Tax as they discuss the Non-marketable Investment Company Evaluation Method.

Bundled pricing now available for AICPA FVS conference and ABV/CFF exam review courses

If you are planning to take the ABV or CFF exam, consider attending the AICPA’s ABV exam review course or CFF exam review course on November 9-10, in Orlando, Fla. Each course provides a comprehensive overview of the information and subject matter that the credentialing exams will cover (business valuation or forensic accounting information, respectively).

Plus, if you are an emerging professional with five years of experience (or fewer), you can also receive a discounted price on the course as well as the AICPA Forensic & Valuation Services Conference, which includes the “Emerging Program for Rising Forensic and Business Valuation Professionals.” The educational sessions for all attending professionals will take place on November 11-13 in Orlando. Email conferenceinfo@aicpa.org for more information on the bundled pricing.

IASB chair frustrated by failure to reach agreement with FASB on financial impairment model

Although both the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have said they are committed to creating a more forward-looking model for the impairment of financial assets, acrimonious disputes between the two boards has stalled convergence, says a recent report in Accountancy Age.

Speaking at an accounting conference in Brussels, IASB chair Hans Hoogervorst warned that the FASB’s more conservative approach to a forward-looking impairment model could force banks to cut back on new lending and cause credit practices to become even more “pro-cyclical.” At the meeting, Hoogervorst expressed frustration at the delay:

If this is going to unravel, I find it for us as standard setters … but also for you … deeply embarrassing that [after three years and] three efforts, in which we have looked at ten alternatives, in which we have left no stone unturned, we are still not able to come up with an answer. I would find that unacceptable.

Do you know an award-worthy M&A practitioner?

Once again, the Alliance of Merger & Acquisition Advisors (AM&AA) and Grant Thornton are sponsoring the “Middle Market Thought Leader of the Year” award, honoring “individuals who have made significant contributions to the middle market M&A profession through the publication of works that promote research and higher standards of excellence,” according to a joint release.

In 2011, John Paglia (Pepperdine University) tied for first place with Robert Slee (Robertson Foley), and so each took home the award. All nominations are due by November 16. To submit yours, click here.


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