ASA posts new guidelines for valuing partial interests
The American Society of Appraisers has just updated its Business Valuation Standards (ASABVS) to include a new Procedural Guideline: PG-2 Valuation of Partial Ownership Interests. After nearly six years in development—including two exposure drafts and consideration of all comments, the ASA BV Committee approved the PG-2 guidelines during its most recent annual meeting in Boston. “PG-2” is now part of the non-binding portion of ASABVS, say Chris Mercer, Chair of the BV Standards Committee, and member Eric Nath, who announced the new release in the most recent ASA E-Letter (Dec. 30, 2009).
PG-2 Valuation of Partial Ownership Interests provides a mechanism to respond to USPAP’s SR 9-4(d) in terms of analyzing ‘the effect on value, if any, of the extent to which the interest appraised contains elements of ownership control and is marketable and/or liquid.’ It further expands on the (binding) comments in SR 9-4(d) calling for appraisers to consider factors ‘such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest.’
By recognizing that the valuation of an ownership interest may differ significantly from the valuation of the underlying entity or asset, PG-2 outlines factors to consider in valuing partial interests, from the purpose of the BV engagement to contractual and legal restrictions. It further addresses the “approaches, methods, and procedures” for valuing these interests.
“PG-2 is an important addition to our BV Standards,” say Mercer and Nath, adding the gentle suggestion that “it would be an excellent idea” for all ASA members, candidates, and other appraisers to read the new guidelines in the context of their standard report templates and normal valuation procedures. We never disagree with Chris and Eric.
Divorce court says SSVS-1 is not binding
During the divorce of the California Devries, a court-appointed forensic accountant valued the husband’s construction business under the excess earnings and capitalization of earnings approach, determining no goodwill value. Using three months of past gross profits, however, the expert came up with a goodwill value of $100,000, which the court adopted in addition to a $750,000 asset value. The husband appealed, claiming that the expert’s use of a three month’s rule of thumb violated Standard 39 of the AICPA’s valuations standards (SSVS-1), which provides that rules of thumb “should generally not be used as the only method to estimate the value of the subject interest.”
In In re Marriage of Devries, 2009 WL 4264309 (Nov. 30, 2009)(unpublished), the California Court of Appeal disagreed. Like many state jurisdictions, the California courts recognize the applicability of the AICPA and other professional standards to valuation issues, but they also have a large body of case law holding that valuation is a flexible determination, based on the various facts and circumstances of each case. “The AICPA guidelines are instructive but not dispositive on the issue,” the court held, relying on prior precedent (the valuation of a medical practice using three months of accounts receivables) to confirm the lower court’s decision. Read the entire case abstract in the next (February 2010) issue of the Business Valuation Update™, and the full-text of the court’s opinion at BVLaw™.
FASB releases draft standard on Subsequent Events
In one of its last official acts of 2009, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. “Questions have arisen in practice about Topic 855, Subsequent Events,” the Board says.
Specifically, constituents have informed the Board that the requirements to disclose the date that the financial statements are issued potentially conflict with some of the Securities and Exchange’s (SEC) guidance. This proposed Update addresses both the interaction of the requirements of this Topic with the SEC’s registration requirements and the intended breadth of the reissuance disclosures provision related to subsequent events…
The Board requests comments on the exposure draft by January 28, 2010.
Valuing subsequent events in the coming year
Most of us are looking forward to a better financial world in 2010 (could anything get much worse than 2009?), but most BV professionals will still have to deal with valuation dates set in a turbulent 2009. How should they handle what happened after the valuation? What does it really mean for a subsequent event to be “known, knowable, and foreseeable,” as the court standard goes; and when is a court (or the IRS) likely to consider any event “knowable,” so long as it is also relevant and reasonable?
To kick off the New Year, three of the profession’s best minds will help decipher the standards on subsequent events. Join Jay Fishman, Chris Mercer, and tax attorney Charles Rettig in the first BVR teleconference of the year this Friday, January 8, 2009: “Subsequent Events: Dealing with the Unknown and Unforeseeable.” The discussion begins at 10:00am Pacific time/1:00pm Eastern time; two CPE credits are available. To find out more and to register, click here.
Tightening 409A standards requires new guidance
“I have done a great deal of work in valuing VC-backed companies for 409A purposes,” says Ronald Schmidt, Ph.D., in a recent posting at the Business Valuation Professionals discussion group on LinkedIn (you may need to join before accessing the link.) “We are now talking to some of the auditors and VCs about the rollout of 157 fair value standards to VCs in valuing their portfolios. At present, it looks like the rollout of 409A, [when] standards were pretty loose until the auditors took charge for 123R. It seems to us that ultimately the VCs will be required to value companies using values potentially from 409A—i.e., they will be required to value their holdings of preferred stock. Anyone seeing anything different?”
We see something that will help with 409A. In BVR’s Guide to Valuations for IRC 409A Compliance, author Neil Beaton focuses on the practical aspects of 409A valuations—in particular, how to apply traditional valuation methods and allocation analyses to these engagements. A company’s stage of development is a critical component, and the Guide will help appraisers understand and identify any additional economic, industry, and company variables to provide a well-supported, defensible valuation for 409A purposes.
Is the estate tax dead?
As many predicted, Congress failed to address the repeal of the federal estate tax by the end of 2009. Without such legislation, the tax will be temporarily repealed this year (2010) and restored in 2011 at a rate of 55% on estates valued at $1 million or more, according to the legal tax experts at Wilkie Farr & Gallagher, LLP. As a result, “the automatic ‘step-up’ in basis for property received from a decedent will not be available, and the beneficiaries will instead receive a ‘carry-over’ basis in the property,” with some exceptions.
“The debate over the federal estate tax is expected to continue when Congress returns from recess,” the Wilkie Farr attorneys say. “It has been suggested that any legislation passed in the [coming] year may be made retroactive as of January 1, 2010. Our research indicated that retroactive legislation will likely by upheld as constitutional.”
Great new 2010 CPE from AICPA and ASA
In the next few months, the AICPA Forensic and Valuation Services section will offer a four-part live webinar series on the Cost of Capital, including how to determine discount rates for economic damages cases and capitalization rates for small businesses.
The ASA has also revamped its educational offerings for the new decade, striving to “keep its classes current with economic events,” according to ASA BV Committee Chair, John Barton. In particular, BV 201 will now include the cost approach and market approach and a new valuation introduction, he says. “BV 202 will continue cover the income approach to value. BV 203 will be a new comprehensive case study. BV 204 will be a special topics course covering five areas: 1) valuation adjustments (i.e. DLOMs and DLOCs); 2) valuation in volatile markets; 3) pass-through taxation issues; 4) an introduction to valuing intangible assets, and; 5) international cost of capital.” A full array of classes and courses is available on the ASA BV website.
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