FASB clarifies 157 fair value measurement of liabilities  

The Financial Accounting Standards Board has just proposed amendments to SFAS 157 regarding the fair value measurement of liabilities.  “Statement 157 defines the fair value of a liability as the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date,” the new Staff Position No. FAS 157-c explains.  However:

Some entities are concerned that there may be a lack of observable markets or observable inputs for the transfer of a liability.  This is especially true where that liability would continue to exist and where the original obligor is completely relieved of any obligations to the counterparty.

Due to this and additional factors, numerous entities suggested that a liability’s fair value include a “hypothetical measurement attribute” to account for any transfer basis that would not occur in the marketplace.  The FASB Staff began considering these comments in November 2007, and has now responded with FAS 157-c, which would amend the paragraphs of SFAS 157 as follows:

15A. A quoted price for the identical liability (unadjusted) in an active market (Level 1 input) shall be used to measure the fair value of the reporting entity’s liability when available.

15B. In the absence of a quoted price for the identical liability in an active market, the reporting entity may measure the fair value of its liability at the amount that it would receive as proceeds if it were to issue that liability at the measurement date.  A reporting entity shall evaluate fair value inputs and prioritize observable inputs over unobservable inputs in determining whether it should use the amount that it would receive as proceeds if it were to issue that liability at the measurement date.

A footnote explains that “liability” includes a debt instrument or other form of obligation.  To review the complete FAS 157-c, click here.  Note: Comments are due February 18, 2008.

‘Introspective’ M&A market has healthy outlook for 2008

Following last year’s credit crisis, the mergers and acquisitions markets have been “forced to step back and evaluate where they stood,” says a new article, “State of the M&A markets: 2007 Year-End Wrap-Up,” by PCE Investment Bankers’ Mike Rosendahl.  

After some introspection, it appears that the market for middle market companies (value < $250 million) remains vibrant.  While larger transactions (value > $250 million) suffered due to deteriorating credit markets and company performance…strategic and financial acquirers still exhibit strong appetites for quality assets.  Buyers are on the lookout for companies with good product/service mixes that fill a market need and provide strong cash flow.  Financial acquirers flush with cash and strategic buyers with strong balance sheets continue to seek desirable opportunities. 

“While there has been some impact on valuations and debt levels,” Rosendahl adds, “particularly multiples for acquisitions under $50 million, transaction levels and pricing remain lively.”  Current recession fears—as well as ongoing market corrections—will affect the M&A market, but lower interest rates should help keep activity “healthy” in 2008, “although off previous highs.”   The article presents a summary of transaction volume and multiples in 2007, highlighting in particular the strength of middle market transactions.  It also looks at levels of buyout capital raised by PE groups (a total of $289.2 billion in 2007) and financial versus strategic buyers.  The complete article is available at the PCE website.

Free update: Using M&A transaction databases

It’s one of our most popular free downloads—over 600 hits in 2007—and we’ve just made it more current.  “How to Use Transactional Databases for M&A, 2008 Update” includes a comprehensive pricing and valuation checklist for using the transaction databases—Pratts Stats®, BIZCOMPS®, Public Stats™, and Mergerstat®/BVR Control Premium Study™.  Collectively, these databases account for nearly 29,000 total transactions.  The update also provides exhibits that show:

  • how to prepare tables of valuation multiples and select multiples to apply to a subject company’s financial data
  • equity and invested-capital multiples computed by each database
  • quantity of transactions in each database, sorted by sale price
  • sample transaction reports from each database

To obtain your free copy, look for the “update” among BVResources’ new free downloads, available here.

PCAOB adopts new auditing standard on financials  

Yesterday the Public Company Accounting Oversight Board (PCAOB) voted to adopt Auditing Standard No. 6, Evaluating Consistency of Financial Statements, and an accompanying set of amendments to the Board's interim auditing standards.  The Board adopted these measures in light of SFAS 154, Accounting Changes and Error Corrections, and the impending SFAS on the Hierarchy of Generally Accepted Accounting Principles.  “The new standard and related amendments update the auditor's responsibilities to evaluate and report on the consistency of a company's financial statements and align the auditor's responsibilities with SFAS No. 154,” says the PCAOB release.  The new standard also clarifies that the audit report should indicate whether an adjustment to a prior financial statement “results from a change in accounting principle or the correction of a misstatement.” 

Another change: The Board also relocated the hierarchy of GAAP from its interim auditing standards to the accounting standards, to align with the FASB’s intent to incorporate the same.  The FASB also plans to coincide the effective date of its GAAP hierarchy standard with that of the PCAOB.  Auditing Standard No. 6 and the amendments will become effective sixty days after approval by the Securities and Exchange Commission.  More information is available at www.pcaobus.org.

First-ever global study on impact of private equity

At its 2008 meeting in Davos, Switzerland last week, the World Economic Forum (WEF) released the Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008.  The new, comprehensive report focuses on: the demography of global private equity deals; the willingness of PE-backed firms to make long-term investments globally; and the impact of PE investments on the employment levels of firms in the U.S. and corporate governance in the U.K.  “We believe [this] is the first study in the past quarter century to use exhaustive data sets to provide empirical analyses of private equity transactions on a global scale,” says the WEF report. 

For instance, the demography project examined 21,937 LBO transactions across 19,500 distinct firms globally from January 1970 to June 2007.  A core research team, led by Josh Lerner (Harvard Business School) and noted international academics, spearheaded the study.  Among its key findings:

  • Holding periods.  Almost 60% of PE fund investments are exited more than five years after the initial investment.  In addition, the length of time firms remain under the control of private equity investors has increased in recent years.
  • Bankruptcy.   6% of buyout transactions end in bankruptcy or financial distress.  This translates to a default rate of 1.2% per year, compared to an average default rate of 1.6% for U.S. corporate bond issuers and 4.7% for U.S. junk bond issuers.
  • Employment.  Employment has a "J-curve" pattern in the years pre- and post-buyout.  In the two years prior to a buyout, PE-backed companies cut 4% more of their workforce compared to a control group.  In the two years post-buyout, the average employment difference is 7% lower for the PE targets vs. the controls.  In the fourth and fifth years after the transaction, employment at PE-backed firms mirrors that of the control group.
  • Globalization.  From 2001 to 2007, 12% of global LBO transactions took place outside North America and Western Europe (9% in terms of deal value), “a considerable increase over previous decades.”  Compared to developed markets, emerging PE markets focus primarily on minority and growth capital investments, and while “not without challenges, [they] present a host of opportunities.”

Detailed case studies examine the globalization of PE industry via six transactions in China, India, Germany, and the U.K.  Links to the full study—as well as complete coverage of the 2008 WEF meeting—are available here.

IRS audits target partnership and S Corps

IRS enforcement efforts increased again in fiscal year 2007, focusing on “riskier” businesses and wealthy individuals, according to its Fiscal Year 2007 Enforcement and Services Results.  For instance, compared to 2006 audits, last year the IRS audited 84% more returns of individuals with incomes of $1 million.  “In the business arena, the IRS continued efforts to review more returns of flow-through entities—partnerships and S Corporations,” the study says, an area where it perceives “growth and potential risk.”   While large corporate audits are down slightly, “we have increased our focus on mid-market corporations—those with assets between $10 million and $50 million dollars.”  Other enforcement highlights:

  • Audits of S Corps increased to 17,681 during 2007, up 26% from the 2006 total of 13,984.
  • Audits of partnerships increased to 12,195 during 2007, up almost 25% from last year.
  • Audits of mid-market corporations increased to 4,473, up 6% from last year.
  • Audits of businesses in general rose to 59,516, an increase of almost 14% from the prior year’s total of 52,223.
  • Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the number of audits is up 14 percent from the fiscal year 2002 level.

For access to the full report, click here.

Grabowski takes editor’s reins at BVReview

Roger Grabowski is slated to become the new editor of Business Valuation Review, the quarterly professional journal published by the American Society of Appraisers and featuring business valuation articles by leaders in the profession.  “We are very fortunate to have someone of [Grabowski’s] stature in the business valuation profession assume this responsibility,” says Terry Allen, current ASA chair. The journal “is one of our most valuable assets and we have had outstanding editors—first Jim Schilt and then Jay Fishman.”  Fishman, in particular, served seven years at the editorial helm in addition to numerous, ongoing efforts at the ASA.  “I cannot think of anyone more qualified than Roger to follow them in this key position,” Allen says in her update to members.  “Thank you to Roger for his willingness to take on this job.”  Thanks also to the continued hard work of Susan Mueller, who has agreed to continue as Managing Editor.  To access current and archived copies of Business Valuation Review, click here.

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