Members of new Valuation Resource Group announced
They were coveted and they went quickly: Spots on the new Valuation Resource Group, recently formed by the Financial Accounting Standards Board (FASB) to address issues relating to valuation for financial reporting, have been filled. (FASB announced its intention to form the group last June, as an outgrowth of its Invitation to Comment on the need for valuation standards in financial reporting; see BVWire #57-4™). Current members include representatives from each of the “Big 4” audit/valuation firms and also the “Non-Big 4” (American Appraisal, Duff & Phelps, Houlihan Lokey Howard & Zukin, and The Financial Valuation Group). As reported in last week’s ‘Wire, the International Valuation Standards Committee is the only non-U.S. member of the group; there are also “observers” from the IASB, the AICPA, the PCAOB, SEC, Moodys, and the CFA Institute. Carla Glass represents The Appraisal Foundation, while Duff & Phelps’ David Larsen sits in for private equity .
A complete list of members is available on the most current update to the FASB’s Valuation Guidance for Financial Reporting project. The Valuation Resource Group will likely hold its first (non-public) meeting in October 2007.
IVS 2007 has arrived
The International Valuation Standards Committee (IVSC) has just published the 8th edition of the International Valuation Standards (IVS 2007). In development for two-and-a-half years, this latest edition has undergone extensive revision and updating, with several new components. Rewritten sections include: International Valuation Standard 2, Bases Other Than Market Value and Valuation for Secured Lending Purposes. The 2007 edition contains a new International Valuation Application, Valuation of Public Sector Assets for Financial Reporting; a new Guidance Note, Valuation of Historic Property; and other new features such as a chart diagramming the hierarchy of property rights and a useful addendum to GN 8 (Profitability Test When Reporting DRC). “Much attention has been given to standardizing terminology and identifying relationships to international accounting standards,” according to the publishers.
To purchase a copy of IVS 2007 ($75.00) click here. The price includes postage and handling, and covers the cost of standard-setting activities by the IVSC, a non-profit organization.
Lessons from Countrywide Financial—
Finding the liquidity ‘sweet spot’
When Countrywide Financial filed its Form 10-Q with the SEC earlier this month, revealing its difficulties due to widespread disruptions in the mortgage-backed securities market, the company got hammered on Wall Street. Its stock fell 10% within days—and helped to set the Dow Jones off on a wild ride of its own. Several days ago, concerns about whether Countrywide could survive a market liquidity squeeze drove its shares from $28.80 to $15.31, but then Friday’s news of the Fed easing rates helped push the shares back to $23.90.
“Last week’s mortgage market turmoil highlighted why lack of liquidity drives the value of stocks, especially in relation to privately held companies,” says Brian Pearson (Valuation Advisors, LLC). In the case of Countrywide, as the news of higher default rates on subprime and standard mortgages entered the financial markets, “investors in these securities could not easily assess how bad the ‘damage’ was to these mortgage portfolios,” he says. “It also made investors realize the risk to their business was a lot higher than the market was aware, and that mortgage securities might not be worth their stated value.” Rather than wait for the dust to settle, investors sold their stock, fearing that worse news was to come.
Clearly, lack of future liquidity was a key driver in these dramatic events. “Investors are willing to take large losses in the real world," Pearson says, "or, in the privately held world, they take discounts to reduce the price to where the rate of return becomes commensurate with the underlying liquidity or the risks any lack of liquidity presents.”
Tomorrow’s teleconference. Pearson is the founder of The Valuation Advisors' Lack of Marketability Discount Study™, the web-based tool used to quantify discounts for lack of marketability (DLOM). Be sure to join him tomorrow, Thursday, August 23, 2007, for BVR’s teleconference on “Valuation Advisors and DLOM.” In the framework of such current issues as the Countrywide crisis, Pearson will demonstrate how the Valuation Advisors database can help financial analysts pinpoint the “sweet spot” for dealing with lack of liquidity discounts in valuing the stock of privately held companies. He will also take participants through step-by-step searches of the database, answering any questions in “real-time,” as they come up. Registrants will also receive a special discount on database subscriptions. To register, click here.
The last word on BV:
Has its professionalism spawned an industry?
The question—is business valuation a profession or an industry?—began a debate in the BVWire that could end up, in one commentator’s view, as being purely rhetorical. “Is it a false choice to begin with?” asks John Borrowman. The question may never be settled, he says. “It’s no surprise that appraisers consider what they do to be a profession. It has all the earmarks: the ethics, standards, credentials, and the organizations behind them. …The last thing you want is to engage an appraiser who doesn’t act as a consummate professional. But could it be that this very professionalism has spawned an industry?
“Love it or hate it, the propagation of credentialed practitioners…has brought a significantly higher profile to the profession,” Borrowman adds. “When more people hear about business valuation, more people buy business valuation.” The increasing exposure and demand has led to more jobs, more revenues, more regulation, and more recognition for the business of BV. “At its core, appraisal has been and will always be a profession,” he says. But it’s also become the sort of “economic engine” that typically drives an industry.
Borrowman has been serving the BV industry as a recruiter since 1995. His complete comments appear in the current issue of his quarterly newsletter, The Business of Valuation, posted at the Borrowman Baker website; click on the opinion piece, “You Say Po-tay-to, I Say Po-tah-to.”
Avoid these estate tax audit triggers
What are the ten most common triggers of a Form 706 (estate tax) audit? The August 2007 issue of Estate Planning Journal has posted highlights from the article by Jill Miller, “Common Estate Tax Audit Triggers and How to Avoid them.” Chief among them: failure to provide explanations for lower-than-expected value, and failure to include or value all assets. The posting is available here; click the “download” button to open or save the file. (Originally posted by tax attorney Charles Rubin at his “Rubin on Tax” blog, August 6, 2007).
Alternative definition of fair market value?
How about flair market value: “the price that would be paid by a greedy lawyer and a zealous IRS agent, neither of whom have had any real world business experience.” This “alternative” definition came out of a recent session on estate planning and family limited partnerships—and was passed onto us by Alina Niculita (Shannon Pratt Valuations). Ken Becker, CPA (former BVResources CFO) added the “flair” to the definition. As always, send your BV-related quips, comments, and questions to the editor.