BVR announces plan to replace and enhance terminated Morningstar cost of capital products
Morningstar's announcement two weeks ago that it discontinued the Cost of Capital Resource Center, the SBBI Valuation Edition, and its beta and industry "tear sheets" has left a temporary gap for business appraisers. BVR plans to continue these key resources.
First, the Duff & Phelps Risk Premium Calculator and Reports will be expanded to include industry risk premia, additional small-company cost of capital tables, and other features. Roger Grabowski (Duff & Phelps) announced these improvements Monday at the ASA Advanced Business Valuation Conference in San Antonio.
Those familiar with the Morningstar SBBI Valuation Edition should also take heart: It will be replaced by the new 2014 BVR Enhanced Valuation Yearbook, available in March to coincide with the normal annual release from Morningstar. This new version will continue the familiar SBBI calculations but will include liquidity analyses and more frequent updates than past editions. BVR is currently assembling a team to manage this transition without interruption to SBBI customers, CEO David Foster reports.
- Historical industry and beta "tear sheets" will continue to be available, it's believed, at the Morningstar site. A new BVR/D&P Cost of Capital Calculator is also in the works to allow appraisers the ability to calculate current or historical peer group beta or industry discount rate.
- The Cost of Capital Yearbook will also be replaced in the second quarter of 2014.
- A new Duff & Phelps International Risk Premium Report is scheduled for release in April 2014. This will replace and enhance the Ibbotson annual international study for those who need country-specific discount rates. Jim Harrington of Duff & Phelps comments that this study "has been in development for several years."
- Other cost of capital-related products including Grabowski and Pratt's Cost of Capital, fifth edition, will be available from BVR as well.
"Our aim is to release the new BVR Cost of Capital Center in early January, to guarantee uninterrupted service for those customers who rely on the discontinued Morningstar products," says Foster. "After January, we hope to continue to add improvements and new products, and we're looking forward to working with the business valuation community on all the future enhancements."
Some key takeaways from the Atlanta BV conference
Speakers presented different takes on issues that impact valuation professionals at the recent 14th annual conference of the newly reorganized Southeast Chapter of Business Appraisers held in Atlanta. Here are a few key points:
Economy: When watching key economic factors for signs of new business in the economy, make sure they’re relevant, says Laurel Graefe (Atlanta Federal Reserve). She points out that, while unemployment figures are relevant for purposes of evaluating trends, they don’t accurately measure the level of unemployment in the U.S. The data are collected much the way they were 30 years ago—through telephone surveys.
Statistical tools: Using means and medians are meaningful when the data set is normally distributed, stresses Sherry Smith (Zephyr Financial Corp.), who discussed tools for making better projections. In most cases, however, we deal with data that are not normally distributed and often have no upper bounds. In such cases, the standard deviation is not meaningful and techniques such as Bayesian statistics can be useful, she says.
Pratt’s Stats® began reporting the harmonic mean a couple of years ago in the summary portion of its search results. Lari Masten (Masten Valuation), in her presentation on the market approach, says there are startling results between the arithmetic mean and the harmonic mean.
When using the arithmetic mean instead of the harmonic mean, the value will mostly be higher (potentially overvaluing a company) and not be representative of the market values. This ties into Smith’s point that arithmetic statistical measures such as the mean, median, and standard deviation are based on normal distributions. In the case of a perfectly normal distribution, the arithmetic mean and the harmonic mean will be very close.
Intellectual property: An often overlooked aspect of reviewing intellectual property (IP) is in process R&D. The next generation of intellectual property can be critical to the value of a business, according to Mark Zyla (Acuitas Inc.). The stage of IP R&D heavily impacts the value of technology companies. Companies with IP R&D generally have more value than those without. Zyla says that, in some cases, the value of the IP could exceed the value of the company when IP is underutilized.
We’ll have more on this conference in next week’s BV Wire. Want to attend next year? The 15th Annual Conference is scheduled for September 19-20, 2014, also in Atlanta.
FASB and IASB jump-start disclosure project
The FASB has issued a Q&A Fact Sheet designed to clarify its Disclosure Framework project. The goal of the project is to help accountants decide what disclosures clearly communicate the information that is the most important to users of financial statements for public and private companies, and not-for-profit organizations.
Separately, the International Accounting Standards announced that it has formed a new staff group to work on its own Disclosure Initiative to address concerns about how financial information is disclosed. The initiative brings together members of the IASB’s standard-setting team with the eXtensible Business Reporting Language (XBRL) team, which reflects the increasing importance of electronic filing of financial information.
USPAP 2014-15 edition released
The Appraisal Foundation has released the 2014-15 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). Separately, the Appraisal Standards Board (ASB) has issued USPAP Q&As on the following topics: rebuttals and appraisal review, the difference between appraisal and appraisal report, signed and dated certification requirement for an oral appraisal review, and differing scopes of work.
Most accounting expert witnesses are CPAs
A recent listing of accounting expert witnesses mentioned in court opinions or decisions in 2013 reveals that 88% were CPAs. The listing, which is “not exhaustive and only for informational purposes,” includes 189 forensic accounting expert witnesses with multiple credentials. As for the prevalence of other credentials, 31% were certified in Financial Forensics, 29% had the ABV credential, 16% were CVAs, 16% were CFEs, and 10% of witnesses on the list were ASA.
IRS discovers DCF is a ‘double-edged’ sword
“Use at your own risk” is the lesson a financial expert for the IRS learned when she used the discounted cash flow (DCF) method to bolster the agency’s argument that the taxpayer was liable for appreciable goodwill related to a like-kind exchange.
Station swap: The plaintiff owned KZLA, the only country-music FM station in the Los Angeles market, but, when the station kept underperforming in a fast-growing market, it agreed to a station swap with another communications company. The exchange value of the assets was $185 million. The value of KZLA’s tangible assets was approximately $3.4 million, and the value of all its intangible assets, excluding the station’s FCC license and goodwill, was about $4.8 million. An appraiser calculated the value of the FCC license using the “residual fair market value” method—subtracting the value of the tangible and intangible assets from the $185 million exchange value and assigning the difference (the residual) to the FCC license. The appraiser assigned no value to goodwill claiming that: (1) legal precedent held that “broadcast stations do not possess any goodwill”; and (2) KZLA, in particular, "does not possess any other traditional manifestations of goodwill." The license was worth nearly $176.8 million, the appraiser said.
Under I.R.C. Section 1031, a taxpayer may defer recognition of gain or loss from qualifying exchanges of like-kind property. But, under Treas. Reg. Sec. 1.1031(a)-2(c)(2), a business’s goodwill is not of a like kind to the goodwill of another business. Therefore, the nonrecognition provision does not apply. The IRS issued a deficiency notice claiming there was a goodwill value of $73.3 million on the transaction date. Ultimately, the plaintiff sued in the Court of Claims for a refund.
The court found indications of goodwill but required the IRS to show whether the goodwill was appreciable or negligible. The agency’s expert tried to isolate the income attributable to the FCC license by performing a discounted cash flow (DCF) analysis of the station, treating it as a startup. She created projections for the revenue, operating cash flow, and net free cash flow that KZLA could reasonably be expected to achieve in the market, based on past performance, market operating and financial benchmarks, as well as the performance of other radio stations in the Los Angeles market. Discounting the net free cash flow to present value, she then extracted the value for KZLA's license. She initially found it was worth $131.4 million, which left a residual value of goodwill of $45.4 million. After correcting for errors in her cash flow projections and working capital calculation, she lowered the amount to $36.5 million.
No goodwill: The plaintiff’s rebuttal experts highlighted three errors that if corrected would increase the license value to $179.6 million, leaving no portion of the purchase price to assign to goodwill. The court agreed and in a detailed chart showed that the effect of the proposed adjustments was that there simply was nothing left for goodwill. “[T]the use of discount calculations to value goodwill represents a double-edged sword in that the numbers can demonstrate the presence or the absence of goodwill,” the court concluded.
Find an extended review of Deseret Management Corp. v. United States, 2013 U.S. Claims LEXIS 987 (July 31, 2013) in the November issue of Business Valuation Update; the court opinion will be available soon at BVLaw.
What’s in the November Business Valuation Update
Here’s what you’ll see:
- Restricted Stock Studies That Back Up the DLOM (BVU Editor). One of the most convincing types of evidence that supports the concept of a discount for lack of marketability (DLOM) is found in studies of restricted stock. At least 16 articles have been published since 2000 that report discounts along with their analysis.
- Valuing Shareholder Loans in Divorce: What Is It Worth? (Christine Baker, CPA/ABV/CFF). After a shareholder loan has been deemed to be a bona fide debt of the company, payable to the shareholder, the valuation analyst has yet another task: determining the fair market value of that debt.
- Avoiding the Valuation of Referrals in a Healthcare Context (BVU Editor). A recent jury award illustrates the pitfalls of valuing an arrangement that involves a healthcare entity and physicians. Various valuation contexts are discussed.
- Using Oracle Crystal Ball for Monte Carlo Simulation (Steve Hoye, CFA, MBA). Perspectives on the experiences and interactions with valuation analysts over the use of Oracle Crystal Ball.
To read these articles—plus a digest of the latest court cases—see the November issue of Business Valuation Update (subscription required).
CPE training events
Valuing Marijuana Dispensaries (October 24): Learn the dangers of valuing sellers and dispensaries of medicinal and newly legalized cannabis in a hazy regulatory environment. Presenters: Ronald Seigneur (Seigneur Gustafson LLP) and Jim Marty (Jim Marty and Associates LLC).
Valuing Dermatology Practices (October 29): Changes in the healthcare economy, regulatory guidance, and the evolution of dermatology practices have changed the landscape for valuing these entities. Presenter: Mark Dietrich. Part ten of BVR's 2013 Online Symposium on Healthcare Valuation.
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