Contribute to best practices guidance on control premiums

The Appraisal Foundation’s third Working Group is currently developing best practices guidance on the application of control premiums in financial reporting. Prior to releasing an Exposure Draft, the Group is soliciting broad input from the BV community on a key discussion questions regarding the assessment and measurement of control premiums, including:

  • Should you adjust an observed, publicly traded market share price to reflect a control fair value?
  • Is it ever appropriate to apply a negative control premium to the publicly traded share price?
  • What is the most appropriate method for calculating the control premium: the equity method, total invested capital method, cash flow method—or some other?
  • When using comparable transactions, what qualitative and quantitative techniques are appropriate to refine the raw data and select the appropriate premium?

Submit comments by mail, fax, or email to: Working Group 3—Control Premiums, c/o Paula Douglas Seidel, The Appraisal Foundation, 1155 15th Street N.W., Suite 1111; Washington, D.C.; 202.347.7727 (fax); The deadline is January 15, 2010

ASA is also working on guidance: The American Society of Appraisers (ASA) is also developing a best practices paper on valuing partial interests, including the application of control premia. Eric Nath, who’s helping to spearhead the ASA effort, says “there’s a whole lot more complexity to think about than most folks realize.” Stay tuned…

New, free download: top resource on multi-tiered discounts

In the annual “Hardball with Hitchner” session that closed the successful AICPA BV Conference, a question came up regarding the application (and courts’ acceptance) of multi-tiered discounts. The expert panel—Mark Zyla, Linda Trugman, Rob Burkett, and Bob Duffy—generally agreed that they each applied multi-tiered discounts when and where appropriate. Duffy, for instance, analyzes the various entity tiers to discern at what level the interests(s) start to lose control, marketability, etc., and values each tier accordingly. Wrapping up the subject, moderator Jim Hitchner alluded to a paper/presentation by Will Frazier—a “wonderfully written, step-by-step analysis whether tiered discounts are appropriate and if so, how to apply them.”

Where is this resource available?
Why, at BVResources, of course. “Turtles All the Way Down” has just joined our long comprehensive list of free valuation resources and podcasts.

Ten ways lawyers kill their own experts

Financial experts can make or break a case for economic damages, lost profits, taxable fair market values, dispositions in divorce, shareholder dissolutions—and more, but many lawyers “inadvertently destroy their experts' credibility,” says a recent report by the American Bar Association. The most common “bad attorney habits” include

  • Finding experts at the last minute
  • Failing to set aside sufficient client funds to retain an expert
  • Suggesting unreasonable or inappropriate assumptions
  • Introducing bias
  • Ignoring the expert’s input
  • Asking experts to testify outside the scope of their expertise

How can experts help attorneys avoid these mistakes? Don’t take on a litigation engagement without sufficient time to prepare and disclose your expert opinion pursuant to the applicable rules. Make sure to get all the timeframes and deadlines in a case as soon as possible, so that you can send your “wish list” (document/discovery request) to the attorney with ample allowance for responses. Make sure the scope of your expert designation fits your experience and proposed testimony. Lastly, be realistic about costs and don’t whittle the scope of the engagement to fit the client’s budget if it compromises your ultimate opinion and/or compliance with professional standards.

Educate your attorneys.
Help the attorney learn about the case, says another ABA article, “Attacking Adverse Experts.” Although geared toward litigators, the article’s insights lend themselves to application by experts—plus it gives away the tricks and tactics that attorneys are currently using to prove you wrong, including researching all your prior publications, presentations, and trial testimony.

For example, experts can help identify and expose critical mistakes by the opposing expert, and can provide possible questions for use in cross-examination. The goal is not to “win” the case in cross-examination, but to focus the attorney’s attention on two or three weaknesses in the other side—“explicit, specific areas where the adverse expert is wrong.” Important reminder: Although the law on privileged communications is uncertain in this area and may be changing, you should always assume that any communications with the attorney may be subject to discovery.

Last chance CPE—and first chance on new tax research

In the public market, one factor can affect—and be affected by—many other factors, says Nancy Fannon in the introduction to her forthcoming guideonthe Effect of Tax Policy on Value in the Private Capital Markets. Most believe one of the most importing factors is shareholder taxes—and this is the subject of Fannon’s groundbreaking new research.

It’s also the subject of the final installment in BVR’s 2009 teleconference series. Today, December 16th,Fannon will host “The Effect of Taxes on Value in Private Capital Markets”, based on her new Guide and its compilation of the latest academic research and analysis. To find out more—and to download her introduction for free—click here. The conference begins this morning at 10:00am PT/1:00pm ET. Don’t miss this chance to hear Fannon’s pioneering new work and get your last two CPE credits of 2009.

FASB expects to amend FAS157 disclosures by year’s end

In one of its last meetings of 2009, the Financial Accounting Standards Board (FASB) reviewed the 110+ comments it received regarding its Exposure Draft (ED), Improving Disclosures about Fair Value Measurements. The Board deferred amending the Level 3 sensitivity disclosures until it convenes on its joint project with the IASB, but added the following disclosure requirements:

  • Transfers in/out of Levels 1/2. A reporting entity shall disclose separately the amounts of significant transfers in and out of Levels 1and 2 and list the reasons for the transfers.
  • Activity in Level 3. In reconciling fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separate information about purchases, sales, issuances, and settlements, on a gross rather than net basis.

The Update will also clarify existing disclosure requirements:

  • Level of disaggregation. A reporting entity should provide disclosures for each class of assets and liabilities, and apply judgment in determining the appropriate classes.
  • Disclosures about inputs and valuation techniques are required for both recurring and nonrecurring fair value measurements, Level 2 or Level 3.

Effective date. The final amendments will be effective for reporting periods beginningafter December 15, 2009, with the exception for the Level 3 activities, above, which will be effective for fiscal years beginning after December 15, 2010, according to its project update. Early adoption is permitted. The Board expects to issue the final Update by the end of 2009.

BVR announces new, online guides and e-books

The 2009 update of BVR's Guide to Fair Value in Shareholder Dissent, Oppression and Marital Dissolution is now available. In addition to the print copy, this year’s update includes free online access that includes real time updates such as recently published court opinions and case abstracts, new articles, conference presentations, podcasts, news and blog feeds. The Guide is available in digital format and can be loaded onto any eBook reader. The 2009 edition features:

  • Articles from leading experts such as Gil Matthews, Bruce Silverstein, and others.
  • A reference chart summarizing the shareholder dissent/oppression statutes in all 50 states, categorized according to how the state’s courts typically address the application of discounts in fair value appraisals
  • Complete transcript of the teleconference "Standards of Value," with experts Jay Fishman, Shannon Pratt, and William Morrison
  • Abstracts of all the most recent, leading statutory fair value cases (originally published in the Business Valuation Update™).
  • Each case abstract also comes with the full-text of the court’s opinion—along with other “landmark” decisions in the statutory fair value realm.

Check out all the online resources now available at BVResources—including the comprehensive Guides on healthcare valuation, IP valuation, lost profits damages, discounts for lack of marketability and more. Look for additional e-releases in 2010!

Happy Holidays. The BVWire™ will be taking a break next week, and resume publication on December 30, 2009.

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