More full employment for fair value specialists

Last Friday the SEC’s Division of Corporation Finance posted its Sample Letter to public company CFOs on applying SFAS 157 to the Management Discussion and Analysis (MD&A) portions of their quarterly Form 10Q filings.  In particular, current market conditions may require valuation models that rely on “significant” use of Level 3 measurements (unobservable inputs) for some assets and liabilities, the Letter says:

Given the judgment you must apply in using unobservable inputs to determine the fair value of your assets and liabilities, your use of them can have a material effect on your results of operations, liquidity, and capital resources, where for example, the fair value you determined falls within a broad range.  If you conclude that your use of unobservable inputs is material, please disclose in your MD&A…how you determined them and how the resulting fair value of your assets and liabilities and possible changes to those values, impacted or could impact your results of operations, liquidity, and capital resources.

“In general, CFOs are going to be under intense pressure to divulge anything that might impact the company's measure of fair value,” comments Neil Beaton (Grant Thornton).  He believes this latest action from the SEC (combined with regulatory oversight from all sources) will expose companies to increasing shareholder liability, just as in the days of insider trading.  “CFOs are more likely to take a hard line and write down much more than they have in the past or that might be warranted by the situation,” Beaton adds.  And they might be calling more frequently on independent appraisers, he says, creating yet another version of the “full employment act” for valuation specialists.

FASB moves forward on financial statements and more

Last week the Financial Accounting Standards Board (FASB) issued an Invitation to Comment (ITC) on Reducing Complexity in Reporting Financial Instruments.  The ITC seeks input on whether the Board should add a project to simplify and improve standards for measurement of financial instruments and, if so, what kind of projects or approaches it should consider.  The ITC also includes and requests feedback on the International Accounting Standards Board’s Discussion Paper, Reducing Complexity in Reporting Financial Instruments, which seeks similar information on improving measurement of financial instruments.  Responses to both are requested by September 19, 2008.

FSP on convertible debt garners substantial negative comments.  At its board meeting last week, the FASB considered the proposed FSP APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).  The vast majority (46 out of 57) comment letters disagreed with some aspects of the proposed FSP.  Investment banks and other preparers—including Bear Stearns and Lehman Bros.—accounted for 39 of the comments; public accounting firms (6) and users (3) comprised the rest.   According to the meeting handout:

A significant number of respondents that opposed the proposed FSP asserted that (a) the current accounting treatment for such instruments (that is, application of the guidance in paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants) is correct, (b) the accounting should not be changed for a subset of convertible instruments, and (c) a requirement to separate the liability and equity components of convertible debt instruments will increase complexity in financial reporting.

Moreover, substantially all comment letters requested postponing the effective date by at least one year to provide entities with more time to understand and implement the accounting guidance—which the Board agreed to do, even as it voted to move forward with finalizing the FSP.  To access all comment letters, click here.  

New blog connects BV specialists and business owners

The mission of the new blog, Driving Your Company’s Value, is to assist business owners and managers “in understanding what drives a company's value and to master the business literacy (knowledge) required to take advantage of those drivers of value.”   Sponsored by the SBV Network and hosted by Jim Rigby and Bill Quackenbush, the site is among the first to offer a forum in which guest BV bloggers can post entries specifically geared toward business owners and the creation of company value.   A list of categories appears on the right side of the site; current topics range from administration to venture capital, debt placement to ratio analysis and recommended reading.  Postings are also “tagged” according to six broad areas of business activity and interest: leadership, marketing, finance, administration, sales, and operations.

“Postings should be 200 to 700 words in length,” says host Jim Rigby.  If accepted, guest postings can link to a longer document (such as an article) and/or include multiple parts.  For example, a posting on “Understanding Your Financial Statements” will have thirteen parts when finished, Rigby says.  A recent posting by Terry Allen (The Financial Valuation Group) covers the three ways to increase cash flow.  Accepted postings will include the guest blogger’s contact information, making the site an effective promotional vehicle for participants (especially because search engines generally give blog postings a higher ranking based on their higher levels of interactivity).  To find out more, check out the “About Us” section of the new site; subscription is quick, easy, and free.

Implied minority discount added to Mergerstat/BVR database

Last week’s BVWire™ uncovered a surprising statistic: A live poll conducted during the recent BVR webinar, “Getting the Most from the Mergerstat®/BVR Control Premium Study™” revealed that most attendees (41%) use the database primarily to calculate a minority discount, while a quarter (25.6%) use it for the control premium and 10.3% use it to calculate the valuation multiples.  To accommodate the majority of users, we’ve added a new feature.  The database now calculates the Implied Minority Discount (IMD) automatically and includes it on every transaction report and in the summary statistics on the search results page.  The IMD is calculated using the Mergerstat control premium as follows:  1 - [1/(1 + Mergerstat control premium)].  To see the improvement, click here.

Expanded Mergerstat offerings.  The Mergerstat/BVR link at BVMarketData now offers these new sections:

  • The Mergerstat® Review is the annual, comprehensive source on the M&A market that delivers data on private and public companies in the U.S. as well as cross–border transactions. The latest (2008) edition is ready now and makes an excellent complement to the database.
  • Flashwire Monthly instantly delivers M&A statistics and analysis—including the latest U.S. deal activity by industry—in a monthly PDF, plus extra, quarterly reports on Asian and European transactions.

Subscribers to both will save substantially—up to $295.  To find out more, check out the article by Shannon Pratt on the difference between the Mergerstat/BVR Control Premium Study and the Mergerstat Review, available here.

What a judge prefers in a BV expert  

For the second year, the ASA’s New York City Chapter joined with the NYC Bar to offer their mock trial event: “What’s it Worth in Divorce?” which took place last month in Manhattan.   Charles Coyne (Empire Valuation) and Joan Lipton (Lazar Lipton Valuation Services) starred as the respective experts on behalf of the husband and wife.   Both provided top-notch testimony under examination, cross-examination, and redirect, to Judge Rosalyn Richter (Supreme Court, New York County).  While they both took substantially similar approaches to the appraisal of the assets, they disagreed on three classic areas of conflict: the cap rate, the marketability discount, and whether all assets were, in fact, “operating.”   In the process, both Coyne and Lipton offered textbook guidance on how to deal with leading questions, respond to evidence from opposing experts—and they presented good models on how to explain everything from weighted versus straight averaging, to normalizing financial statements and working with neutral experts. 

How did the judge respond?   “We’re dependent on our experts to explain things we weren’t taught in law school,” she observed, before adding what most BV professionals already agree on, “Therefore, I prefer to see less time spent on qualification of experts and more time on the testimony.”   In her “final” decision, she credited one expert’s spending more time with the business as well as that expert’s ability to “keep the focus on the material aspects of value” rather than getting distracted by small details. 

Hone your courtroom skills in divorce at the Hands-On Workshop for BV Professionals, co-sponsored by BVR and the ASA, September 16-17, 2008, in Chicago.

Hitchner joins Fishman, Pratt in latest PPC guide

The 18th edition of PPC’s Guide to Business Valuations debuts this month—and now features the work of James Hitchner in addition to co-authors Jay Fishman and Shannon Pratt.  The new edition, published by PPC and Thomson Financial, includes detailed guidance on implementing the AICPA’s SSVS 1 (which Hitchner helped write), along with updates on applying the income approach—estimating equity risk premiums, tax affecting pass-through entities, and using Duff & Phelps data.  For information, contact the publisher at

May is a month of conferences

Next month kicks off the busy BV conference season, with several gatherings on both coasts—and a couple in mid-country.  In New York City, the ASA’s local chapter meets May 5 for a seminar on current BV topics.  Likewise, the NY State Society of CPAs meets May 19-20 in Manhattan for its annual BV conference, this year featuring speakers Nancy Fannon, Rob Slee, Susan Mangiero, Mel Abraham, and more.  On the opposite coast, the annual SoCal Appraisers BV meeting (with Pricewaterhouse Coopers) happens on May 16 in Los Angeles, followed by the California CPA Education Foundation's BV Conference on May 28, which focuses on executive compensation. 

Chicago will see two springtime conferences: the Illinois CPA Society holds its annual BV conference on May 6 and the Appraisal Issues Task Force meets on May 13.  (Note: the AITF, a voluntary group of professional appraisers who work to improve the practice of valuation, meets quarterly and is open to all interested parties.)  Last but not least, Las Vegas hosts the biennial AICPA/AAML National Conference on Divorce May 8-9.  For up-to-date contact information for these conferences and more, visit the current BVR Calendar.

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Copyright © 2008 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC

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