February 7 , 2007 | www.BVResources.com | Issue 53-1

IRS meets with the ‘Big 4’ BV societies

The IRS is poised to “ratchet up” its oversight of the appraisal community: First there was Circular 230, then the Pension Protection Act (PPA) of 2006 this past summer—followed by the almost lightning speed with which the Service issued Notice 2006-96, its interim guidance on the “qualified appraiser/appraisal” provisions of the PPA (see BVWire # 49-4). (And by the way, the IRS just issued Notice 2007-07, its “extensive guidance” on several PPA rules relating to distributions from tax-qualified retirement plans.)

But here’s the good news for BV analysts: On January 17, 2007, the IRS met with representatives from all four accrediting organizations (AICPA, ASA, IBA, NACVA) as well as those from the Appraisal Foundation, the Appraisal Institute, and others, to discuss the “professional responsibility of a valuation analyst under the [PPA],” according to Tom Hilton (Anders Minkler & Diehl, LLP), a panelist on BVR’s recent telephone conference on BV Standards.

“The IRS is in the process of developing guidelines for the professional responsibilities of appraisers pursuant to Treasury Circular 230,” confirms Mike Crain (FVG International), who represented the AICPA at the Washington, D.C. meeting. “The IRS solicited input and feedback on those guidelines,” he adds, which are now in the drafting stages.

In all likelihood, the discussions will lead to broad guidelines regarding appraiser practice before the IRS—including substantial adherence to USPAP standards; and further down the road, revisions to the ethical requirements contained in Circular 230. “[Our profession] is no longer the Wild West,” Hilton says. “These folks are serious, and it’s a wake up call for all of us.”

For a full transcript and/or CD of BVR’s telephone conference, which includes more commentary on IRS initiatives and convergence of BV standards by panelists Ed Dupke, Jay Fishman, and "master" moderator Ron Seigneur, click here.

More from the IRS: new settlement guidelines on FLPs

A subscriber recently asked for information on minority and marketability discounts relating to Family Limited Partnerships (FLPs)—specifically, what the IRS had approved in recent cases, and we were happy to point him to sources by Mel Abraham (www.flpvaluation.com), including his most recent e-alert. “In this issue we provide a newly issued document related to FLP valuations, setup, gifting and other issues, all of which can impact a valuation,” Abraham says. To read the IRS Settlement Guidelines on Family Limited Partnerships and Family Limited Liability Corporations, which addresses, among others, the key issue of whether the taxpayer has made an indirect gift of the underlying assets, go to www.valuationeducation.com/tips.html, and then follow the links to the current issue.

And the final word from the IRS in LAX this week

One of the more timely sessions at this week’s Second Annual National IRS Symposium on Valuation Issues in Los Angeles will look at the Service’s current positions on FLPs, as well as its methodology for valuing fractional interests in real property and blockage discounts; a general session will focus on professional responsibility under the Pension Protection Act. For more information on the February 8, 2007 conference, click here.

If you can’t be in Los Angeles on such short notice—watch for our conference coverage in next week’s issue; the IRS, in conjunction with the local L.A. Chapter of the ASA, has been kind enough to permit the BVWire to attend its Second Annual Symposium—another sign the Service is as serious about appraiser outreach as it is oversight.

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FASB proposes Staff Position on FAS 128-a

This week the Financial Accounting Standards Board (FASB) announced its proposed Staff Position on FAS 128-a, Computational Guidance for Computing Diluted EPS [earnings per share] under the Two-Class Method. “The existing literature provides clear examples of the application of the two-class method in computing basic EPS,” says the FASB proposed statement, with emphasis in the original, “but does not specifically address or illustrate the application of the two-class method in computing diluted EPS. As a result, questions have been raised about computing diluted EPS when an entity has common stock, participating securities, and potential common stock.”

The Staff Position proposes to answer these questions under a specific, three-step process. To read the FSP FAS 128-a, click here; comments are requested by March 27, 2007.

SEC approves market-based stock options model

The Securities and Exchange Commission has officially blessed a new method for valuing employee stock options using a market-based, auction approach from Zions Bancorporation. Employee Stock Option Appreciation Rights Securities or “ESOARS” may be “the best way to obtain the fair market value of employee stock options,” according to Zions executive vice president, in a report to CFO.com. To comply with FSAS 123R, “many companies—especially in the technology industry—complained existing methods such as Black-Scholes produced too high a value for options, and too big a hit to earnings.” But ESOARS may enable the financial services company to assess a lower value to its stock options.

How? As a public company, Zions Bancorporation “has the ability to conduct a public auction of their common stock options through ESOARS,” comments Neil Beaton (Grant Thornton, LLP). “Since ESOARS are traded in the open market, Zions is able to assess their value directly from market observations—and deriving values from third party market transactions is in line with the FASB’s hierarchy of value,” codified in FSAS 123R and elsewhere. “Public companies with the ability to issues ESOARS-like options will most likely be allowed to substitute their stock option pricing with external observations. Although the vast majority of private companies will still be forced to use a Black-Scholes or lattice model for their expense deductions,” Beaton says, “if enough public companies begin to issue ESOARS, the opportunity for entrepreneurial valuators to craft a methodology to value stock options based on market observations will rise.”

What’s behind the M&A boom?

Last year set a record for mergers and acquisitions worldwide: Deals totaled $3.79 trillion—or 38% higher than in 2005, and 55 of the transactions were valued at more than $10 billion each, according to Thomson Financial data. Private equity firms were “major movers in this trend,” responsible for 20% of the global M&A activity and 27% of U.S. deals, says a new report by U. Penn.’s Wharton School of Business. But, “how long will this M&A binge continue, and when it does come to an end, what will be the factors behind the retreat?” For the answers from Wharton Management Professor Harbir Singh, click here.

A new tool for mapping a company’s competitive position

A new tool from BNET.com will “walk you through the process of conducting a competitive analysis using the strategic group map technique.” After answering a few questions about a subject company, a business appraiser will be ready to draw a strategic map for the related industry. Drawing on Michael Porter's “five forces” as well as a traditional SWOT analysis, the map will illustrate the competitive forces within the industry, the subject company’s competitive position as well as its competitors' positions. Try it out by clicking here.


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Copyright © 2007 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC

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