April 17, 2013 | Issue #127-3  

Which transaction databases do valuation experts
use most?

Information is king, and business valuation pros realize that success often hinges on the nature of their data sources. Early results of BVR’s 2013 BV Firm Economics and Best Practices Guide reveal the three most widely used private and/or public company transaction databases to be Pratt’s Stats (used by 81% of survey respondents), BIZCOMPS (60%), and Factset/Mergerstat (39%).

Other transactional databases mentioned, in descending order, are: NACVA/IBA Transaction Database (36%), Public Stats (30%), Capital IQ (23%), DoneDeals (19%), PitchBook (15%), and Thomson Financial Worldwide M&A (5%).

In terms of yearly rankings, Pratt’s Stats has been in the top spot since BVR began the survey in 2006. BIZCOMPS has held steady in the second position during this same time span. Factset/Mergerstat edged past the NACVA/IBA Transaction Database for third place this year.

Our thanks to everyone who participated in the survey, which collected data on a variety of issues. We will provide further analyses here in future issues of BVWire and also in the BV Update.

FASB OKs partial relief from ESOP fair value disclosures

ESOP companies will get an indefinite deferral on the requirement to disclose quantitative information on how they value nontraded securities, including securities of the sponsoring company. However, the qualitative information—the valuation method and key inputs—will still have to be disclosed. This was decided at the April 10 Financial Accounting Standards Board meeting.

While the FASB recognized the importance of disclosing all information on the valuation of private company securities held by employee benefit plans, it understood that some of this information is proprietary. The disclosures are made public by the DOL on Form 5500, which posts the information online.

The disclosure requirement is contained in Accounting Standards Update Fair Value Measurement (Topic 820, formerly FAS 157), which became effective for nonpublic entities beginning in December 2011 and thus will impact those ESOPs with December 2012 year-end plans this year. The DOL reporting deadline is July 31 (October 15 with an extension).

What to do: The key point now is to disclose the valuation method and main inputs in such a way as to prevent “reverse engineering,” that is, to prevent competitors from taking the disclosure and backing into a valuation figure. But what has to be disclosed does not have to be the valuation formula—just the generic method and a basic description of the inputs. The FASB believes that the required qualitative disclosure can be generic enough to quell the fears of ESOP companies and still comply with the rules.

FASB will issue a limited exposure draft by May 1 with a 30-day comment period. It expects to have a final version out before the July 31 reporting deadline for ESOPs.

Impairment is on the agenda at ASAF
kick-off meeting

The Accounting Standards Advisory Forum (ASAF), the new group that will advise the International Accounting Standards Board (IASB) on the development of global financial reporting standards, met in London for its inaugural meeting. The main technical subjects discussed were the IASB’s Conceptual Framework and the impairment projects.

The IASB and members of the ASAF also signed a joint memorandum of understanding, which sets forth the purpose of the ASAF, its operating activities, and its role in providing advice to the IASB. The ASAF is also seen as a way for IASB to expand its arrangement with the U.S. Financial Accounting Standards Board to include input from other countries that have made more headway with International Financial Reporting Standards (IFRS). Last month, it was announced that FASB would be among the inaugural members of the ASAF.

The decade-long convergence efforts between the FASB and IASB have yet to bring about an agreement between IFRS and U.S. GAAP. The IASB and FASB continue to have some disagreements over the impairment rules for bank loans and credit losses.

IASB chairman Hans Hoogervorst said in a statement, “This was a very productive first meeting, with all parties working together in a highly collaborative manner.”

To see a recording of the webcast of the meeting and corresponding documents, go to the ASAF meetings page.

IRC Section 409A applies to discounted stock options, court affirms

In terms of taxpayer liability under Section 409A of the Internal Revenue Code, does it really matter whether a stock option is discounted?

This issue was at the center of a recent pretrial ruling from the U.S. Court of Federal Claims that has sparked interest from LinkedIn’s BV Professionals Group (registration required). Under the statute and accompanying regulation (Notice 2005-1), nonstatutory stock options may qualify as deferred compensation and, as such, must be included in gross income. If the option is granted “at the money,” that is, the strike price is equal to the fair market value of the underlying shares at the grant date, Section 409A does not apply. Any amount includible in gross income is also subject to interest on prior underpayments, and an additional income tax equal to 20% of the compensation is required to be included.

The taxpayers (a husband and wife) worked for a prominent semiconductor firm. As a senior executive officer, the husband received an option to a fixed number of shares that did not have a readily ascertainable fair market value at the time of grant. He exercised three fully vested portions of the option in 2006 during a transition period between the effective date of the statute and the effective date of the applicable regulations. The amount in dispute in his refund suit was $5,282,125, plus interest.

The IRS conceded that if the option price aligned with the fair market value, there was no Section 409A taxation. But the taxpayer rejected this premise. Discounted or not, there was no taxable event until he exercised the option and sold the stock, he said. For a number of reasons, the issue of discount was not relevant to resolving the case in his favor.

For one, under California law, which governed his option agreement, he did not have a “legally binding right” to compensation until exercise. The government countered that the option itself was compensation and created a right to compensation upon vesting. If granted at a discount, there was deferred compensation from the date of vesting. “[T]he vested options give the optionee the legally binding right to purchase shares at a designated price,” the court found.

The right to purchase shares is not a right to compensation, the plaintiff countered. That argument also had no traction. Even if the option did not have a readily ascertainable market value at the time of grant, “[t]he grant itself, however, constituted compensation,” the court said. Once the option vested, he had a right to buy shares at a designated price.

The court also dismissed the taxpayers’ other arguments. The case is now headed to trial and will turn on the factual (valuation) issue of whether the taxpayer was granted an option at a discounted price. Stay tuned. Find a complete discussion of Sutardja v. United States, 2012 U.S. Claims LEXIS 126 (Feb. 27, 2013) in the June Business Valuation Update; the court’s opinion will be posted soon at BVLaw.

CPE events bloom in the spring

Join BVR on April 25 for Valuing Professional Practices, when Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) examines the many challenges posed by service-based businesses. From key person value and goodwill to valuing a firm whose main asset is its workforce, this webinar is a must attend for anyone tasked with appraising a professional practice.

Cost of capital takes the spotlight in two upcoming events. On April 30, Carol Carden (PYA GatesMoore) and Don Barbo (Deloitte Financial Advisory Services) talk about the unique and dynamic payment structures in the healthcare industry and how they are creating Challenges in Estimating Cost of Capital in Healthcare. Then, on May 16, BVR presents the intensive, four-hour Advanced Workshop on Cost of Capital, featuring Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson). You’ll get a thorough examination of cost of capital determination as well as a roundup of today’s most pressing issues.

Want to delve more deeply into family law?

Valuation issues concerning the division of property is just one topic to be discussed at the AICPA Family Law Conference coming up May 8-10 in Las Vegas. The conference is designed for the beginner/intermediate level and will cover basic rules of evidence, communications, draft reports, and more. It will also focus on the interrelated aspects and financial implications of business and family, litigation and divorce, and valuation and tax issues of property division.

In memoriam:  Robert Dunn

BVWire is saddened to report the loss of attorney Robert Dunn this past weekend. One of the country’s leading legal experts on commercial damages, Bob was highly respected by attorneys, business appraisers and economic damages experts alike.

Reflecting on Bob’s career, friend and colleague Everett Harry (Harry Torchiana LLP) tells BVWire that in the mid-1970s, Bob identified the need to evaluate and categorize court decisions involving economic damages, which resulted in the 1978 edition of Recovery of Damages for Lost Profits. The 6th edition was published in 2005 and supplemented in March 2013. “Bob never stopped searching for and digesting important legal findings and rulings on the topic,” says Harry. “The effort was enormous and the results ever so valuable to lawyers and economic damages experts. Bob made sense out of thousands of federal and state cases.” Despite the time demands of this undertaking, Bob wrote two more books, launched and edited the Dunn on Damages journal, and frequently appeared at national conferences for forensic and valuation experts. Harry says, “Bob was a visionary thought-leader and a real difference-maker for us. His published works have been integral to my professional career.”  But more important, says Harry, “Bob became my closest friend over the last 10-plus years. He was intellectually gifted and quite well informed across a wide variety of topics. I will miss his professional contributions but even more his personal company.”

Dunn on Damages publisher and colleague James Hitchner (Financial Valuation Advisors) offers his condolences: “I was shocked and saddened to learn about the untimely death of Bob Dunn and his nephew Dylan Barry. My thoughts and prayers go out to Bob, Dylan, and their families. Bob was an icon in the damages calculations, fraud, and litigation area, having written several books including the seminal book Recovery of Damages for Lost Profits, typically referred to as ‘Dunn on Damages.’ I had the pleasure of working with Bob the last few years on publications and presentations. He was very bright, organized, dedicated, and a pleasure to work with. I was also impressed by his passion to be the best he could be. He was the consummate professional and will be sorely missed.”

BVWire and the many team members at BVR send our special condolences to Bob’s family, friends, and colleagues. We enjoyed working with Bob on so many occasions over the years. He will be missed.


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