Appraisers send 'serious concerns' to the SEC
In a letter that was posted on August 4th to the SEC website here and dated July 22, 2008, the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers (the authors) banded together to send a letter highlighting their serious concerns to the SEC regarding its Advisory Committee’s Draft Report on Financial Reporting. Although their letter is primarily focused on real estate appraisals, they also “point out that the protocols of professional appraisal practice….are also observed by valuation professionals in other disciplines,” including business valuation.
The authors wrote, “the Report does not recognize that valuation specialists and the valuation community have an important role to play in fair value reporting” and that “the recommendations should utilize the existing body of knowledge in the valuation profession.” They also address some of the Report’s criticism (see pages 22-23 in the Report) regarding what the Report claims are (1) a lack of a single set of generally accepted valuation standards; (2) significant variances in the quality, skill and reports of valuation specialists; (3) no mechanism to ensure ongoing quality, training and oversight of valuation specialists; and (4) that auditors should reduce dependence on valuation specialists and create new valuation curricula in accounting programs.
Is this a dismissal of the valuation profession by the SEC’s Draft Report? There are several professional organizations that have promulgated business valuation standards, including the AICPA’s SSVS1, USPAP, ASA, IBA, NACVA, CICBV, IVSC, in addition to the International Glossary of Business Valuation Terms and the Internal Revenue Services’ Examining Process. On a more positive note, and for the betterment of users of valuation reports, it appears there has been a recent effort to find common ground in these standards.
The authors closed by informing the Advisory Committee that valuation specialists are “highly trained professionals who meet rigorous valuation-specific requirements involving experience, education, training and testing; who adhere to the Uniform Standards of Professional Appraisal Practice; and, who observe strict ethics and independence mandates” and that they “encourage greater understanding of professional appraisal designations and the body of knowledge of our profession.” If you have any comments on this, please send them to email@example.com.
Donald P. Wisehart, ASA, CPA/ABV, CVA, MST, (Wisehart Inc.) and David Anderson (Amper, Politziner & Mattia, LLP) have provided comments about this as follows:
Regarding item (1) above, although there are multiple valuation standards, I believe that i) the development sections of all the valuation standards identified in the Report to arrive at “an opinion of value” are virtually the same, and ii) the reporting standards relating to “an opinion of value” (that is a detail, full or comprehensive report) vary somewhat in disclosure, but are very similar. Items (2) and (3) must and can be addressed through the self-policing and peer review programs of promulgating organizations. The same problems existed with the AICPA before it instituted its self-policing and peer review policies and programs. I hope the SEC will stand up and assist us with these issues to insure the integrity of what we do and to weed out the “Valuation R’ US” practitioners that cheapen, literally and figuratively, our profession. Item (4) is tantamount to throwing out the baby with the bath water. Don and David hope to demonstrate a coalescing of valuation standards in an upcoming article in the Business Valuation Update.
More on Bergquist: Red flags ‘waving wildly in the wind’
As mentioned in last week’s BVWire™, the IRS recently advocated—and convinced the Tax Court to adopt—combined discounts for lack of marketability and lack of control amounting to nearly 65% in determining the fair market value for a medical service corporation. In Bergquist v. Commissioner (July 28, 2008), several doctors took charitable deductions for donating their stock in the medical corporation, which was slated for conversion to a tax-exempt organization. They relied on an appraisal that used the going concern premise to value the stock at nearly $402 per share—but under the same facts, the IRS assumed a liquidation value for the company, and determined the stock was worth approximately $37 per share, including the substantial discounts. According to Judge Swift’s opinion, the taxpayers’ appraisers neglected to explain “how or why they selected a going concern premise of value, and they conveniently and incredibly make no mention of the scheduled . . . consolidation.”
Commentators are already taking about Bergquists’ potential impact on estate planners and appraisers alike. “Estate planners who work with valuation discounts will be encouraged by the valuation analysis employed by the government’s expert and the adoption of that analysis by the [Tax Court],” according to Steve Leimberg’s Estate Planning Newsletter (#1329, August 8, 2008). Notably—although the published opinion does not name the IRS expert, a current press release reveals that it was Texas-based HSSK healthcare expert (and frequent BVResources contributor) Don Barbo.
At the same time, appraisers could be discouraged by the hefty, 40% accuracy-related penalties that the Tax Court assessed on the taxpayers. A recent e-report from the McIntyre School of Commerce Foundation, for example, notes that “each of the six doctors was promised a ‘150K’ benefit. Instead. . . the doctors ended up paying taxes, penalties and interest of over $100,000 each. When they were told not to involve their personal tax advisors in the meeting, the red flags were waving wildly in the wind. While the appraisal firm also bears some responsibility for an assumption the court deemed highly unreasonable, the doctors and their advisors should also have been forewarned of future problems.”
'Do you have any sample business valuation reports?'
We get this question all the time—to which we have typically replied “we don’t, because we find it difficult to get reports from appraisers.” That was then, and this is now. The Institute of Business Appraisers (IBA) and Business Valuation Resources are now offering the just-released IBA Guide to Sample Business Appraisal Reports, Volumes I and II.
This Guide is a response to appraisers who say “I could do one of these reports if I could just see one as an example.” The 12 included reports are real life reports (redacted to protect the subject business and appraiser) that have been through the IBA’s rigorous review process. Examples of the included reports are:
- Appraisal of minority interest in a limited partnership for estate tax return. Illustrates 100% discount for lack of control—limited partners cannot access asset values.
- Limited scope assignment for the appraisal of a pool and hot tub retailer for purchase by long-time employee, whose bank requested the appraisal. The report presents a range of values for the business, including a value derived from the use of small business transaction data.
- Countertop and flooring business appraised for sale when owner had significant under-reported income. Illustrates typical adjustments in respect of the tax avoidance choices made by many small business owners.
- Operating company distributing HVAC products appraised for internal planning. Application of multiple period model and detailed write up of company specific risk.
Click here to view the Guide’s Introduction with more details and here to purchase this must-have Guide for your reference library.
Pratt receives 'Prestigious Honorary ARM Designation'
The American Society of Appraisers issued a press release in which they declared that Dr. Shannon Pratt, CFA, FASA, MCBA, CM&AA (Shannon Pratt Valuations, Portland, OR), Mr. Chengjun Wang of China and Mr. Hakob Sarkissian of Russia, received the highest honor offered by the Appraisal Review and Management (ARM) discipline. As “pioneers of modern valuation concepts and practices and as pillars in and to the global valuation profession,” the three individuals were honored at an awards dinner on Sunday, August 3rd. The original press release is available here.
Get out your cheat sheets
The revisions to SFAS 141 bring about several notable changes relating to acquisitions. After their recent webinar, Getting Ready for SFAS 141R: Business Combinations, Mercer Capital (Memphis, TN) provided BVR with a “cheat sheet” displaying the changes from SFAS 141 to the new SFAS 141R (download it here). Mercer Capital also posted to their website a video of their recent webinar, as well as other free articles on SFAS 141R (view them here). Enjoy the cheat sheet—and don’t worry, we won’t tell your teacher.
Website valuation is their domain
In this day and age, it’s certainly not atypical for a business to own a website. In a business appraisal, this can present the challenge of placing a value on the domain. Ebizvaluations is a free online valuation tool that boasts a database containing a large number of real website sales. The tool takes a user’s inputs (such as traffic, revenue, costs etc.) and provides a free report detailing the value of the website in question. Learn more here.