Fair value engagements—communicate early & often

In the complex (and often controversial) world of fair value for financial reporting, business valuators have learned how important it is to talk with auditors at the beginning of engagements, to become aware of any particular issue or interpretation that might factor into the auditors’ expectations.  Remember when four different auditors took three different views on tax affecting?  (See BVWire™ #56-4)  When these same panelists assembled for the BVR/ASA first annual National Summit on Fair Value last week in New York City, each offered his opinion on the most critical element of SFAS 157 fair value measurements:

• Peter Wollmeringer (KPMG): The concept of highest and best use
• Matt Pinson (PricewaterhouseCooper) : The unit of valuation used to assess highest and best use
• Stamos Nicholas (Deloitte Financial Advisory Services): Levels 1, 2, 3, in the hierarchy of value and in particular, the supportability of Level 3 inputs
• Arthur Miller (Ernst & Young): Defensive Value and moving away from the entity's own intended use of asset

Likewise, in his overview of equity compensation valuations, Neil Beaton emphasized the importance of talking to auditors early, to discuss the specific purpose of the engagement, whether for 409A (income tax compliance) or 123R (financial compliance)—or both.   “The driver of a 409A appraisal is often financial reporting for equity compensation expense and, ultimately, 123R option valuation,” he said.  While 409A valuations are geared toward the individual, 123R takes the company perspective.  Another astute observation from Beaton and co-presenter Bob Duffy: "If you're doing 123R work, read SAB 107."  This SEC Staff Accounting Bulletin (March, 2005) expresses staff views on the interplay between 123R and certain SEC rules and regulations—in particular, its views “regarding the valuation of share-based payment arrangements for public companies.”  To obtain a copy, click here.

Fair Value Summit: ‘Progress toward a common goal’

Bob Siwicki (Siwicki Greenburg LLC, Media, PA) took exception to statements that we attributed to auditors at the Fair Value Summit in last week’s ‘Wire.  In the continuing interest of promoting a “same team” approach to relations between auditors, appraisers, and company clients, we offer Siwicki’s comments, below, and our apologies for any misrepresentations of what was, from our perspective, an incredibly exciting and productive gathering:

I am writing to correct any negative perceptions that may have been conveyed by your February 6th item on the National Fair Value Summit (“Auditors & CFOs: ‘We will not train the valuators’”).  I, a valuator, attended the summit and viewed it as a successful forum where regulators, CFOs, and valuation specialists exchanged their views freely.  Everyone, it appeared to me, was there to make progress toward a common goal.  At no point did I hear anyone say “we will not train the valuators,” and it is beyond me why you chose to lead the story with this headline and then repeat it, without attribution, in the text.  It needlessly calls into question the credibility of valuation specialists, and diminishes the positives generated by this historic event.  Let’s face it: In the nearly seven years since SFAS 141 and 142 were released, we have all made great strides getting at the truth of what fair value means.  Anyone can take a misstep, and I fully expect that your fine e-newsletter will continue to be a reliable source of valuation information in future issues.

As always, feel free to email the editor with your insights, comments, or questions.

New improvements to Pratt’s Stats and Public Stats

As a result of direct feedback by subscribers and BV experts, BVResources has implemented the following improvements to the Pratt’s Stats® and Public Stats™ databases to make them the most useful—and useable—source of deal data:

• Source documentation.  We have added source documentation for each transaction so that users can differentiate between a transaction sourced through a contributing intermediary or an SEC filing. 
• Five new ratios.  In addition to the eight financial ratios provided for each transaction, we now calculate five new ratios, categorized by profitability, leverage, liquidity, and activity ratios.
• Additional search criteria. We’ve provided the ability to search by public and/or private buyers.
• Excel download enhancement. For added value, we have re-formatted the Excel® file download to include the Additional Notes and Terms fields.
• Search speed & quality. We’ve upgraded our software to increase the speed of searches and to allow for an increased number of search results.

For more information on the improvements, visit the Pratt’s Stats and Public Stats FAQ pages.  Also feel free to give the faster search engines a spin at BVMarketData.com.

FASB seeks input on its current role, future agenda

The Financial Accounting Standards Advisory Council (FASAC) has just released its 2008 Annual Survey on the Priorities of the FASB, the fifth in the series that started in 2004.  The survey solicits views on: the FASB’s role in the future of financial accounting and reporting; its current agenda priorities; and past and future financial reporting issues. 

Notably, respondents can provide feedback on the SEC’s recent rule permitting foreign issuers to file their financial statements according to IASB standards (IFRSs) without reconciliation to U.S. GAAP.  The survey posits three possible options: 1) “Mutual recognition” for foreign issuers only; 2) a two-GAAP system for U.S. issuers; or 3) a single set of high-quality international accounting standards for all U.S. public companies.  The FASB supports option three—moving U.S. issuers to an improved version of IFRSs—because it would “enhance comparability and reduce analytical complexity” for investors, and would be consistent with the continuing globalization of capital markets, bringing the U.S. in line with most others (Europe, Australia, China, Russia, Japan, Korea, India, Canada, etc.).

Related survey questions solicit opinions re: the best authority for guidance on global accounting standards; and whether there should be a gradual (“piecemeal”) or abrupt (“big bang) adoption of IFRSs.  Remaining items ask respondents to rank the top five priorities on the FASB’s current agenda, whether any projects should be abridged or removed; and what specific industry or economic trends might give rise to future financial reporting issues.  The Board requests responses by March 3, 2008, preferably online.  For more information, click here.

Key sources for healthcare valuations

“Healthcare Valuations have never been more challenging,” according to Don Barbo (Hill Schwartz Spilker Keller LLC).  Barbo—a frequent speaker on healthcare valuations (most recently at the AICPA National BV Conference in New Orleans), says this field is rapidly changing due to reimbursement issues, loopholes quickly opening and closing, advances in technology, and Medicare fee changes.  To track the latter, according to Mark Dietrich, also a frequent healthcare contributor, is the Medicare Payment Advisory Commission’s (MedPAC) annual report to Congress; the 2007 update is available here.  Another significant and often-overlooked source for future physician supply: AAMC.org, which provides statistics on total med school enrollment and graduates, among other data. 

The most important issue when appraising a medical practice, these experts say: work with your healthcare attorney and understand the buy-sell agreement.   Join Barbo, Deitrich, Carol Darden, and J.D. Epstein for the next BVR teleconference on “Healthcare Valuation” on February 20, 2008, when they’ll update industry sources, discuss the latest technological advances, recent changes in the regulatory environment, and more.  To register, click here.

Second call for USPAP comments

The Appraisal Foundation has sent a second notice of its Invitation to Comment on USPAP and USPAP education.  (See BVWire #64-1)  The Appraisal Standards Board and the Appraiser Qualifications Board will hold an all-day, joint public meeting on March 3, 2008 in Los Angeles to discuss the comments they receive and hear more from panelists and audience members.  The ASB will hold a half-day public meeting on June 6, 2008 in Atlanta.

“We are very interested in your feedback,” the Boards say, “and would sincerely appreciate any comments you would like to share.”  For those interested in attending the March meeting, the deadline for reserving a hotel room has been extended to February 14, 2008.   More information is available at The Appraisal Foundation website.  To submit comments by February 25, 2008, email to: comments@appraisalfoundation.org or fax (202) 347-7727.  Mail submissions should go to: ASB/AQB ‘2008’ Invitation to Comment, c/o The Appraisal Foundation, 1155 15th St. N.W., Washington, D.C. 20005.  Or call the Foundation at (202) 347-7722.

NACVA adopts SSVS 1

“Thanks for providing the article, ‘Will the Real Business Valuation Standards Please Stand Up?’” writes Claren O’Bannon (MPPW&W, PC, St. Louis), responding to the item in last week’s BVWire.  “It contained a lot of useful information.”  However, O’Bannon points out that the article was written before NACVA adopted its new professional standards, which became effective for engagements accepted on or after January 1, 2008. 

According to its announcement, NACVA rewrote the new standards “so as not to conflict with the AICPA’s newly released Statement on Standards for Valuation Services (SSVS) No. 1.”  Membership approval of the new standards was nearly unanimous (98.3%).  In becoming aligned with SSVS 1, the revised NACVA standards now allow oral reports as well as “Detailed,” “Summary,” or “Calculation” reports, O’Bannon reports.  To find out more, click here. 

Insights on intangibles, strategic planning, and more

The current edition of Insights (Winter 2008), by Willamette Management Associates, takes a look at intellectual property management, ESOP planning opportunities, SFAS 157 issues, and the impact of SSVS 1 and the PPA (Pension Protection Act) on analysts and financial advisors.  In particular, an article by Katherine Gilbert and Robert P. Schweihs on identifying intellectual property assets has one of the best and most current overviews, with exhibits that list IP assets in SFAS 141 and IRC Section 197, as well as a thorough discussion of how analysts can understand the position of intangible assets within the broader range of property rights.   Another article by Robert Reilly and Chip Brown examines complex IP transfer pricing considerations.  For the BV and financial journal that keeps living up to its name, check out Insights.