IRS admits Kohler was a ‘learning experience’

At the American Society of Appraiser’s 2007 International Conference in Hollywood this month, the IRS’s Chuck Morris, JD, admitted the Service took away several insights from last summer’s landmark Kohler case. (See BVWire™ # 49-1 , which includes a link to the abstract of Kohler v. Commissioner, originally published in the Sept. 2006 Business Valuation Update™.) 

In particular, the case was “a lesson to the Service as to whom we hire as an expert,” Morris said, referring to the IRS’s decision to retain an expert without specific BV accreditation or membership in the ASA or Appraisal Foundation.  (Its expert was/is a chartered financial analyst and a Ph.D., who has enjoyed success in other valuation contexts and cases, most recently as the Service’s reasonable compensation expert in Wechsler v. Comm’r (2006), [case abstract also available to subscribers of the BVU].)

The Service is listening to input from appraisal organizations and their members, according to Brenda Woolbert, its Team Manager for Engineers and Appraisers, who co-presented the “Update on Appraiser Penalties and the Valuation Process” at the ASA’s day-long BV track.  The IRS website will soon have a specific link for the BV professional, to let you know “how you should do your work,” Woolbert said—(who, like Morris, was voicing her own opinions as opposed to those of the IRS).  Current outreach efforts will focus on strengthening IRS partnerships with appraisal societies and developing meaningful standards of conduct, oversight, and sanctions.   And look forward to greater presence by IRS appraisers at future conferences.

As a reminder, copies of the actual valuation reports used by all three experts in the Kohler case (two for the taxpayer, one for to the IRS) are available to subscribers of BVPapers™.

FASB updates technical plan, 141R project

The Financial Accounting Standards Board (FASB) has just updated its Technical Plan, including highlights of 2Q 2007and scheduled activities through the first half of 2008.  Of particular interest: Its release of FSAS 141R (Business Combinations, Applying the Acquisition Method) appears imminent, due before the end of September. 

What won’t change. The Boards affirmed the original definition of an intangible asset: one that is identifiable (contractual or separable) and measurable with sufficient reliability apart from goodwill.  They also confirmed the premise of value (current exchange rather than entity-specific).  In reviewing a long list of specific intangibles, the Boards preserved the definition of an assembled workforce, for instance, confirming that it should not be recognized as an intangible asset, separate from goodwill.  For their convergent (and sometimes divergent) positions on reacquired rights, R&D assets, and more, read the complete Project Update.

Can a ‘skeletal’ expert report comply with FRCP 26?

In the wake of hurricane Katrina, a Louisiana veterinary hospital sues its insurance company for failing to fully compensate its business interruption losses.  Discovery deadlines are set in the case, including disclosure of expert reports pursuant to Rule 26(a)(2)(b) of the Federal Rules of Civil Procedure (requiring a “complete statement of all opinions to be expressed and the basis and reasons therefore,” the data and any exhibits to be used by the witness).   Inexplicably, the insurance company submits a report that is not signed by the expert (it’s even unclear whether he wrote it).  The report contains columns of figures without any conclusions or defined sources; it’s also missing exhibits and a list of the expert’s qualifications.  The hospital moves to strike the report for failing to comply with FRCP 26.

The United States District Court (E.D. La.) agrees that the “skeletal” report merely provides notice that the insurance company intends to rely on its expert, and fails to substantially comply with the federal rules. But the expert’s testimony is “pivotal” to the defense—and the Court gives the insurance company ten days to comply (plus the penalty of paying for the plaintiff’s deposition of the expert).  To read the full-text opinion of Audubon Veterinary Hospital v. U.S. Fidelity & Guarantee Co. (June 25, 2007), click here.

More importantly: The Federal Rules have recently been amended to include the discovery and disclosure of electronic evidence.  To comply with all of their requirements, don’t miss *today’s* teleconference on “Emerging Issues in Electronic Evidence, Document Retention and Spoliation for BVFLS Practitioners” with experts Ron Seigneur, Melinda Harper, Shari Lutz and attorney Ed Aro. To register, click here.

Is BV ‘just another service’ by a larger profession?

In continuing our online survey, the overall results didn’t change much, as the vast majority of respondents (91%) still believe that business valuation is a “profession” rather than an “industry” (9%).  But one thoughtful commentator asked whether the real question may be: “Is business valuation recognized as a profession, or is it just another service that another profession provides?” 

Or worse—is its recognition endangered by the “misplaced efforts” of its various professional organizations to boost their own prestige by belittling the others?  “To business appraisers and other professional ‘insiders,’ this may be accepted as typical marketing tactics,” says Michele Miles, JD, Executive Director of the Institute of Business Appraisers.  “It shouldn’t be,” she adds. “What makes us a ‘profession’ rather than an ‘industry’ is that we act as fellows working towards a common good….the advancement of the knowledge and tools which we use, and the building of public trust.”

Miles’ comments appear in the current issue of the IBA’s online newsletter, available at its website.  So does a bold editorial by Mike Eggers, who “clearly says what all appraisers think” about the various societies, but warns the IBA, AICPA, ASA, and NACVA to stop their “tribal warfare” and collaborate on one set of harmonious standards before regulators like the SEC, IRS, and FASB do it for them.  (Note: Eggers’ editorial was written before the AICPA issued its current standards—but with hindsight, do the new standards help or hurt his proposed harmony?)   What do you think?  As always, email your comments on these or other important BV-related issues to the editor.

PCAOB proposes new ethics and independence rule

Yesterday the Public Company Accounting Oversight Board proposed for public comment a new ethics and independence Rule 3526, Communication with Audit Committees Concerning Independence.  The new Rule would supersede the Board’s interim requirement (Independence Standards Board Standard No. 1, Independent Discussions with Audit Committees) and two related interpretations.  Specifically, the proposed Rule would require a registered public accounting firm to inform an issuer's audit committee about any relationships between the firm and the issuer that would reasonably bear on the firm's independence. The communications would take place before the firm accepts a new engagement and annually for continuing engagements.

In addition, the Board proposed amending Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, to exclude from its scope the portion of the audit period preceding the beginning of the professional engagement.  The Board is seeking comments on both proposals for a 45-day period, ending on September 7, 2007.  More information is at pcaobus.org.  

ASA BV Committee gets new leader and agenda

Following in Mike Hill’s illustrious footsteps, Terry Allen became the latest chair of the ASA’s BV Committee.  After a meeting during the International Conference, Allen issued a recap of the Committee’s plans for the coming year in the Society’s weekly BV E-Letter.  Improvements to the website are on the agenda, along with new education offerings (notably, a course of intangible asset valuation in October). The ASA’s International Government Relations Committee, chaired by Jay Fishman, will expand to include “members of all disciplines.”   The BV Standards Subcommittee, led by Chris Mercer, will focus on 1) reanalyzing the ASA BV standards in light of recent USPAP changes and 2) responding to emerging issues from FASB and the International Valuation Standards Committee.

Finally, if you missed the recent ASA confab in California, make plans to attend its 26th Annual Advanced BV Conference on October 29-31 in San Diego. Sessions will feature two tracks—one on fair value for financial reporting, the other on advanced fair market value issues, such as new insights into marketability discounts. More program, hotel, and registration information is available here.