The controversial proposed Section 2704 regs have appeared in a list of regulations the Treasury says can be streamlined or withdrawn. This list is included in Notice 2017-28, which is in response to President Trump’s Executive Order 13789, a directive designed to reduce tax regulatory burdens. Comments on the notice are due by Aug. 7, 2017.
Big fight: The proposed regs drew a firestorm of criticism from the business valuation community as well as attorneys and estate planners. An unprecedented number of speakers testified at an IRS hearing to fight the proposed regs that are designed to curb estate valuation discounts for minority interests. Almost 29,000 comments are now included on the IRS docket page, many of which call for the rules to be withdrawn permanently. The American Society of Appraisers has issued a comment letter on the new notice calling for full withdrawal of the proposed regs, according to a news release.
The next step is for the Treasury and IRS to submit a final report by Sept. 18, 2017, to recommend their proposed reforms for the regulations identified in the notice (eight in all). This could range from modification to full repeal of the regulations.
What to do: Submit your comments to Notice 2017-28 by August 7—instructions to do so are in the notice. This is not over yet—voices still need to be heard!
Extra: For background, seeProposed IRC Section 2704: Potential Impacts on Estate and Gift Valuations, a BVR special report. It sheds light on the proposed regulations and helps appraisers navigate the possible implications on the valuation of private-business entity interests for transfer tax (estate, gift, and generation-skipping) purposes.
New AICPA task force to explore calculation reports for litigation
During a recent webinar on the use of calculation reports in valuation, the speaker was asked: Do you see an overall increase in the use of calculation reports? “Yes, and particularly for litigation purposes,” says Jim Alerding (Alerding Consulting LLC), one of the co-authors of VS100 (formerly SSVS No. 1), the AICPA’s BV standard. This is one reason a new AICPA task force (of which Alerding is a member) will explore the issue and provide guidance to practitioners who are increasingly getting their arm’s twisted for a less expensive “rough estimate.”
When the standards were written, it wasn’t contemplated that calculation reports would be used for litigation. It’s fine to use them to help settle a case, but using them in court is another story. If a case is heading into the courtroom, the analyst will often do a more detailed analysis. Alerding points out that, since there is no prohibition or endorsement in the AICPA standards on the use of an opinion of a calculated value by an expert witness, it’s up to the individual to decide whether or not it’s appropriate.
What to do: Alerding, who has testified over 400 times, says he would not go to trial with a number that, by definition, does not include all of the procedures necessary for a valuation engagement. Also, by definition, a calculation engagement includes a statement that, had a valuation engagement been performed, the results may have been different. This does not meet the sufficient, reliable, believable, and “reasonable certainty” tests, he says. He advises that you state in your engagement letter that you are willing to do a calculation for preliminary negotiations, but, if the case goes to trial, you will only testify if you perform a full valuation engagement.
Trial court relies on outside ‘technical advisor’ for Daubert determination
A Daubert hearing in a Mississippi case took an interesting turn when the trial court enlisted the help of a peer review service to evaluate the admissibility of the parties’ proposed expert testimony. Experts should note that the use of this and similar services may become more common in the litigation setting and may even improve the quality of expert work.
The former owner of a construction company sued, alleging that the business’s accounting firm committed malpractice. He claimed the defendant was negligent in the way it audited the company’s financial statements and ended up causing the destruction of the company. The auditor should have informed the board of directors of the improper use of company funds. Had the auditor done so, the former owner “would have done something about it.” Because the auditor failed to discover the misappropriation of corporate assets, the company went downhill and the owner ended up selling it for $1,000. He lost everything and was “broke,” the former owner claimed.
Experts reviewing experts: The plaintiff presented expert testimony on three critical issues: the auditing standard of care, causation, and damages. The defendant offered damages testimony. The trial court used JuriLytics, a California-based academic peer review service, as technical advisor to determine whether the individual expert opinions met the requirements of Daubert. For each of the parties’ reports, JuriLytics provided two independent reviews. The trial court ultimately decided the parties’ auditing standards and damages testimony was admissible, but the plaintiff’s causation opinion failed to establish the necessary link between the auditor’s actions or lack of action and the company’s eventual demise. Considering the technical nature of the case, the plaintiff’s inability to produce expert testimony on causation meant its claim foundered, the trial court ruled, and granted the defendant’s summary judgment motion.
The plaintiff appealed to the state Supreme Court, arguing the law did not require expert testimony in all malpractice cases and that it was able to show causation by way of lay testimony—the company owner’s statements. The Mississippi Supreme Court recently revived the case when it agreed with the plaintiff. Whether the auditor’s conduct damaged the company was a question for the jury, the high court decided. The next test of all of the expert testimony will be cross-examination at trial.
The case is T.L. Wallace Const. v. McArthur, 2017 Miss. LEXIS 271 (June 29, 2017).
‘If a tree falls in the forest and nobody’s there to hear it, does it still make a sound?’
That age-old conundrum comes to mind with the release of O.J. Simpson from the hoosegow and remarks made in the entertainment trade press about his value.
No juice: “Beyond repair” is what Variety reports about Simpson’s reputation in the eyes of Hollywood. Yes, you’ll see him all over the air in news coverage and in interviews, but that’s all, some say. One exec said that, even though there’s money to be made, people in the industry would be “out of their minds” to give him a paying gig. This brings up an interesting question: Do O.J.’s name and image have value if he can’t realize it?
The vast majority (83%) of BV firms require upfront payments before starting work on a new engagement, according to BVR's new Firm Economics & Best Practices Guide. The most standard practice is 50% down, favored by four out of five survey respondents. The second and third most popular alternatives for down payment amounts are 33% and 20%, respectively. A few firms want it all upfront—two firms in the survey say they require “100% of anticipated fees” prior to beginning work. Another firm says it requires 100% in advance for all litigation projects.
Full payment upfront on a litigation matter is something to consider because if you end up in court and the client owes you money, you may not get it if your side doesn’t prevail. That’s like being on a contingency, which is taboo.
Houlihan Lokey comments on new goodwill impairment guidance
The FASB recently issued ASU 2017-04, which essentially simplifies the goodwill impairment testing process by eliminating the Step 2 portion of the existing guidance. In a new paper, experts at Houlihan Lokey provide useful background information on the new guidance, including key observations and the specific dates on which the guidance will go into effect (including early adoption). The paper’s authors are Michael De Simone, Karen Miles, Tomasz Stefanowski, and Paul Vogt.
A new study compares earnings before interest, taxes and amortization (EBITA) with its two more common alternatives—EBIT and EBITDA—in terms of their ability to explain market valuations and predict stock returns. From 1987 to 2016, EBITDA performed better than EBITA, which in turn performed better than EBIT, both in explaining stock prices and predicting stock returns. However, EBITDA’s dominance over EBITA in explaining valuations has been declining over time, while the performance difference between EBITA and EBIT has been increasing. “EBITDA, EBITA, or EBIT?” is by Doron Nissim (Columbia Business School).
Healthcare merger and acquisition activity slowed in the second quarter of 2017, according to new data from Irving Levin Associates. Compared with the first quarter of 2017, deal volume decreased 15%, to 366 transactions. Deal volume was also lower compared with the same quarter the year before, down 14%. Combined spending in the second quarter reached $95.8 billion, an increase of 62% compared with the $59.1 billion spent in the previous quarter.
What’s on BVWire’s radar at the ASA’s Advanced BV Conference
What strikes us from looking at the agenda for the ASA’s 2017 Advanced BV Conference in Houston (October 7-10) is that there’s an emphasis on sessions that mix theory with practice. Here are a few of the sessions we plan on attending:
Regression Analysis: Construction and Interpretation (Mark Shirley);
Evidence of DLOMs for Controlling Interests (Ronald DiMattia);
Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses (Joseph Emanuele);
Using New REIT Data to Value FLPs: Theory and Application (Spencer Jefferies and Jim Park); and
Pitfalls in Determining the Terminal Value in the DCF Model (Gilbert Matthews).
The speakers will present case studies to show their practical application of the theories. We like this approach because it’s designed to give you information that can be put into practice immediately. BVWire looks forward to attending. Will you be there? Come visit us at the BVR booth!
Brand Finance has released its 2017 Global Intangible Finance Tracker (GIFT) that analyzes intangible value at over 57,000 companies. In terms of key findings, it states that intangible value continues to rise globally—hitting $47 trillion (up from $19.8 trillion in 2001). However, as current financial reporting regulations only require disclosure of intangible assets during M&A activity, the new report states that $35 trillion worth of intangible value was left off balance sheets globally in 2016. Much of the study, then, focuses on the contrast between disclosed and undisclosed intangibles. The charge is that IFRS 3 has failed to “adequately report the current real value of both internally generated and acquired intangibles” leading to confusion due to some intangible assets appearing on balance sheets while most do not.
Coalition for Inclusive Capitalism, a not-for-profit organization supported by some of the largest companies in the world, supports the call for companies’ intangible assets—including the value of their brands, reputation, and employee skills—to be included on balance sheets for financial reporting. The coalition is seeking to establish a framework for the valuation of such assets.
In June, the coalition and EY have announced they are bringing together CEOs from over 20 global companies, representing more than $20 trillion of assets under management, to work on a proof of concept to encourage and measure long-term value creation. The project, called “The Embankment Project for Inclusive Capitalism,” will develop and test a new framework to better reflect the full value companies create through human, physical, financial, and intellectual capital deployment.
Sir David Tweedie, chairman of the IVSC, and Ms Indranee Rajah, Singapore’s senior minister of state for law and finance, are among the speakers at the IVAS-IVSC Business Valuation Conference 2017 November 2-3 in Singapore. This is expected to be the leading business valuation conference in Asia Pacific. Early-bird pricing for registration ends August 16.
People:The M&A Advisor announced that Anthony Dolan, a director in Prairie Capital Advisors’ Oakbrook Terrace, Ill., office, was an “Emerging Leaders Award” winner … Mary Elliott has been named CEO of Birmingham, Ala.-based Warren Averett. Elliott is the first female CEO in firm history … Charles Miller has joined Tarter Krinsky & Drogin as a partner, leading the New York City-based firm’s new securities and financial services litigation practice … Price Rainer has been promoted to manager in LBMC’s Nashville, Tenn., office.
Firms:New York City-based Berdon has added Koch Group & Co., also of New York City … BerryDunn has combined with Compass Health Analytics. Both firms are based in Portland, Maine … Blue & Co.’s Columbus, Ohio, office was ranked No. 1 in the large company category on the 2017 “Best Employers in Ohio” list … Enterprise, Ala.-based Carr, Riggs & Ingram expanded in Atlanta by adding AGH … The Corridor Business Journalnamed Honkamp Krueger “Best Accounting Firm” and “Best Business Consulting Firm.” It’s the Dubuque, Iowa-based firm’s third time listed in the annual reader survey … Macomb, Mich.-based Rehmann was named to the Accounting MOVE Project’s “Best Public Accounting Firms for Women” for the fifth consecutive year.
Walk through a methodology for the application of put option models and learn how to apply your chosen model to produce consistent results in a focused session.
Valuing Deferred Revenue (July 27), with Raymond Rath (GlobalView Advisors). This is Part 9 of BVR's Special Series on Fair Value.
Learn from presenter Raymond Rath's experience and value deferred revenue with confidence—and multiple approaches.
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