FASB and IASB won’t make September release date

It looks like the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) won’t be issuing their joint statement on Business Combinations: Applying the Acquisition Method and Noncontrolling Interests by late September, as originally planned.  (See BVWire™ #57-3.)   In July, the IASB published a near-final draft of the converged standard on Business Combinations along with IAS 27, Consolidated and Separate Financial Statements, which included an exposure draft (No. 1205-001) on accounting for noncontrolling interests within consolidated financial statements.

Currently finalizing the requirements for the joint Business Combinations standard, the Boards will release these “as soon as they are available,” according to Thomson Tax & Accounting.  IASB plans to adopt the new standard and revised IAS 27 later this fall.

IRS admits zeal, but takes exception to ‘inexperience’

Although the final item on “flair market value” in last week’s BVWire was “no doubt made in jest, I must take exception to your characterization of IRS agents as not having ‘had any real world business experience’," says Howard Lewis, National Program Manager for the Engineering and Valuation Program at the Internal Revenue Service.  In his current position, Lewis is responsible for the training, professional responsibility, and all work-related matters pertaining to federal tax appraisers and valuation issues within the IRS: 

I have worked very hard, as has my entire senior leadership and management team, to build an increasingly effective staff of professionals.  We have worked to improve their knowledge, skills and abilities.  A significant percentage of our staff are licensed, certified, or otherwise accredited by one or more international valuation societies.  We participate in society activities, very often being called upon to present technical and program information at society annual meetings and conferences.  We have been eminently successful and respected as qualified experts in litigation, and I am proud of our accomplishments and our entire staff of professionals. 

Many of the Service’s valuators also have substantial "real world business experience," Lewis adds (whose opinions are his own, and not those of the IRS).  “That, coupled with the special skills necessary to be an effective agent”—including zeal, which he characterizes as a positive trait—“enables us to fulfill our agency's mission to provide the best possible professional service to our country and all its citizens.”   

As for any “greed” among lawyers, “I will defer to the legal profession to defend itself,“ Lewis says.  “But I would hope that, before maligning the professionalism of our public servants, you would pause and think of the special skills and significant contributions they make every day under what are, very often, extremely difficult circumstances.” 

‘How to stay out of trouble with the IRS’: That’s what Jay Fishman and Michael Gregory, ASA, AVA, PE (IRS) are calling their session at the ASA 2007 Advanced BV Conference in San Diego this October; BVWire has already reserved a spot.  Early-bird pricing for member and non-member registrants is still available here through September 14, 2007.

How about ‘fools’ market value’?

“I would submit that there is another value standard that the industry should consider,” writes Mike Pellegrino (Pellegrino & Associates, LLC), also in response to last week’s item on alternative definitions.  “Call it ‘fools’ market value.’"

By definition, a rational buyer—which is a basic tenet of the efficient market hypothesis and a foundation for the fair market value standard—should never pay higher than the intrinsic value for any asset.  Yet, many ‘rational’ buyers overpay because they get caught up in the hype of a particular asset class or market segment.  Further, by using relative valuation techniques, these buyers rely on the rushed judgment of other ‘rational’ investors who also paid more than the intrinsic value. 

“This drives prices well beyond intrinsic value,” Pellegrino says.  “Some may call this ‘fair’ value in the market.  But in addition to becoming a self-fulfilling prophecy, such hyped buying also creates speculative bubbles.  When the bubble bursts, the ‘rational’ buyers all scratch their heads and lament about how foolish they were.”  There is strong empirical evidence to support this alternate standard of "fools’ market value," Pellegrino contends, and he’s currently analyzing the data for an article (stay tuned).  Any further comments, insights, alternatives to this or any valuation-related topic, email the editor.

All you need to know on the real definition of FMV

Say you wanted to go deeper into the definition of fair market value, from the perspective of the IRS, academics, and financial analysts.  The *new and improved* search engine at BVLibrary.com is the tool to turn to: We’ve just upgraded the site with state-of-the-art capabilities.  Users may now search BVResources products, services, and data by key words and phrases; speed-enhanced software returns results by date, product, or ranking. 

For example, a current search of Deluxe BVU, BVLaw, BVCatalog, and BVPapers using the phrase “fair market value” and “IRS” returned over 650 results.  Among the top-ranked items: a recent clarification by the Tax Court on the fmv standard; an article on replacing the fmv standard in marital dissolution with a fair value standard; an “Ask the IRS” teleconference presentation (led by Michael Gregory); and three IRS training resources and recommendations.  The search engine is accessible to all site visitors. If you’re already a subscriber, you can access the article, court case, or other item from the relevant database. If you’re not a subscriber, you can purchase the product using the link provided on the results page.  It’s that quick—and it’s easily the most comprehensive, valuation-specific library available today. The new search engine is available throughout the BVR site; look for the search button at the top right-hand of each page.  Try it out at BVResources.com. 

The ‘perfect calm’ of private equity prepares for storms

The history of finance makes one point very clear: near perfect conditions, although intrinsically rare and invariably extrapolated by market participants—almost “invariably regress to more normal conditions,” writes Jeremy Grantham, chairman of fund manager GMO, in a recent article for the London Financial Times. 

For the last several years, private equity has existed in a “perfect calm,” enabled by low interest rates, friendly credit, easy leverage, and rising global profit margins.  But when the inevitable regression happens to today’s record profit margins, Grantham says, “all but a handful of private equity deals will lose money and many will lose it all.  At a five-year horizon, even managers who could add 30% to the efficiency of their firms would lose all their equity in highly leveraged deals.”  And of course, “more typical deals that add little or even detract value would do much worse.”  Normal capitalistic competition will drive profit margins for PE-owned companies back down to historically “correct” levels, and when that happens, Grantham predicts, get ready for the perfect PE storm.

Current, state-by-state survey of nonprofit compensation

SalariesReview.com has started posting a list of the highest paid nonprofit executives in each of the fifty states—one state per week—in order of their admission to the Union.  IRS Form 990, the annual data filed by most charitable organizations, furnishes the information, while databases ERI (Economic Research Institute) digitizes the compensation on smaller nonprofits and GuideStar for those with >$1million annual revenue.  “More a census than salary survey,” according to the site, the reports will eventually include compensation data from all U.S. charities except churches and those who don’t file a Form 990.  Currently in its 35th week, SalariesReview is now highlighting nonprofits in West Virginia.

Complete ‘crash course’ on competitive industry analysis

The BNet Report has just posted a comprehensive “crash course” on “How to Gather Competitive Research.” The article formulates the basic framework of competitive analysis—including application of “SWOT analysis” and (Michael Porter’s) “Five Forces”—and then lists the best research resources.  “Three quarters of the information you’ll need…to research a U.S.-based company is available publicly,” the authors say. They provide a thorough list of online sources such as the SEC, Standard & Poors, media sites, a copyright/patent database, along with a link to a related article, “Where to Find the Competitive Information You Need.”  Anecdotes also provide instruction.  For instance, an analyst wanted to know how many employees worked at the rival of a subject company, so he positioned a team member on public property, just outside the factory entrance.  “The researcher counted how many cars passed through the gates in the morning to develop an estimate of how many people worked there.”  For the complete article, click here.