November 30, 2011 | Issue #110-4  

IPR&D guide is ready for public comment

The AICPA’s Financial Reporting Executive Committee (FinREC) has just issued a working draft of its new accounting and valuation guide, Assets to Be Acquired to Be Used in Research and Development Activities. “This guide, which will replace the practice aid that was originally issued in 2001, provides guidance and illustrations for valuation specialists, preparers of financial statements, and independent auditors related to initial and subsequent accounting for, disclosures, and valuation of, acquired in-process research and development (IPR&D) assets,” says a recent FinREC letter to task force members. “This guide addresses many new accounting and valuation issues that have emerged over the years,” and the working draft is available here.

“Interested parties are encouraged to review the working draft and submit their informal feedback by March 15, 2012,” the task force letter continues. “We realize that most of you will be busy after the year-end and appreciate any effort that you could take between now and busy season to provide us with your informal feedback.”

DCF vs. GPCM: which do the judges prefer?

The discounted cash flow (DCF) approach is certainly among the “most prominent” valuation methods, said Judge David Laro (U.S. Tax Court) during BVR’s recent Tax Summit. “I believe it’s the most reliable because it tries to predict the income benefit (available cash) that will come back from a particular investment.” That’s “real world stuff,” Laro added. The inputs of the DCF approach are important, too—such as the discount rate, the cap rate, etc., and they can all be easily examined by the court. “I think it’s the best technique,” Laro said, preferable to the guideline public company method (GPCM) because “you can always find some differences” between the subject company and the selected comparables—and so can opposing counsel.  

At the same time, appraisers should use the GPCM—at least in Tax Court, because Rev. Ruling 59-60 recommends it, and then “the devil is in the details,” observed Judge Julian Jacobs, who’s seen cases in which the expert maintained that one comparable company was a sufficient benchmark. “That doesn’t work,” Judge Jacobs said. “You have to find a reasonable number” and then make sure you can explain any adjustments.

Tax Court moving in direction of DE Chancery? The recent Gallagher decision indicates the specificity with which the Tax Court will examine each variable within any valuation approach, “much as the Delaware courts do,” commented moderator Jay Fishman (Financial Research Associates). “Is that the direction of the Tax Court?” he asked—and all the judges agreed that it was. Indeed, the Delaware Chancery has just issued some important decisions on the recommended number of valuation methods as well as the inputs to the DCF, including determination of the equity risk premium.

To keep up with this important precedent from the “Supreme Court” of corporation law, don’t miss Delaware Chancery Roundtable: Views from the Bench, Council & Witness Stand.  In this special two-hour webinar, Neil Beaton (Grant Thornton) and Stephen C. Norman (Potter Anderson & Corroon) will ask Vice Chancellor Donald F. Parsons Jr. what the Delaware Court of Chancery expects from financial experts, their valuation methods, conclusions, and credibility.

Majority of companies will ‘go it alone’ on goodwill impairment

Is there a role for the independent valuation specialist under the FASB’s new “qualitative” option for assessing goodwill impairment? That was a hot topic of discussion at the third annual Fair Value Summit sponsored by the ASA San Francisco earlier this month. “We’re hearing that a great number of clients are electing to ‘go it alone’ this year,” commented Glen Kernick (Duff and Phelps), who moderated a panel on the FASB’s Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing for Impairment (Sept. 2011). In fact, according to a recent survey of FEI members by Duff and Phelps, the vast majority (81%) indicated they would perform the qualitative assessment used to bypass step one of the traditional goodwill impairment on their own, without enlisting a third-party valuation firm or analyst. That will certainly save costs for public as well as private companies—which was the “driving force” behind the ASU, Kernick said. But the risks of not using an independent valuator may also carry high costs, particularly given the current volatility of global markets. Plus, any companies on the “borderline” will most likely have to submit their assessments to audit or regulatory review (SEC, PCAOB), and the amount of work this will require “is not a whole lot different” than what an independent valuation would entail, since the latter has many of the factors involved in the qualitative assessment already “baked in,” Kernick said, and “the cost savings would not be great.”

Additional highlights of the D&P/FEI survey:

  • Nearly half (48%) of private companies perform their annual impairment testing in December, compared to only 15% of public companies, which perform the testing earlier—most commonly in November (17%), October (21%), or July (11%).
  • Entity-specific operating changes prompt most public companies (43%) as well as private (53%) to perform an interim goodwill impairment test.
  • In performing step one of the traditional goodwill impairment test, the majority (71%) of private companies compare fair value of the enterprise to their respective carrying amounts, compared to 53% of public companies.
  • If control premiums enter into the analysis, 71% of public companies used general-market based studies compared to 53% of private companies.

New update and free download on valuing goodwill

Thanks to a subscriber inquiry, we’ve just updated our ever-popular free download Goodwill Hunting in Divorce to reflect the current state of the law in Tennessee regarding the determination of the goodwill value of a professional practice. According to this one-of-a-kind, state-specific summary, at least 28 jurisdictions now clearly follow the current majority rule, which holds that enterprise goodwill is marital property but professional goodwill is not.

Yet, the recent McReath case out of Wisconsin just as clearly stated that the majority rule was “wrong” because it’s based on the premise that professional goodwill is not transferable. In that case, both parties agreed—and the court found—that a non-competition agreement effectively converted a significant portion of the goodwill value into “saleable” professional goodwill. An Oregon court has already cited (but declined to follow) McReath, and the case has come up in several BV professional venues, most recently at the AICPA conference in Las Vegas and also the latest BVR webinar on the state of the “double dip” in divorce (featuring Stacy Collins from Financial Research Associates and Don DeGrazia from Gold Gocial Gernstein). Given the “must read” nature of McReath, we’ve created a new free download from both the Court of Appeals’ and the state Supreme Court’s decisions; check out this and all our free resources here.

Need CPE? BVR self-study programs now available

Busy appraisal professionals can now receive up to 2.5 CPE credits after viewing one of BVR’s new self-study CPE programs. Currently eight options are available, which give CPE credit after viewing the archived program plus completion of an online exam (and paying a small processing fee).

Or consider these “live” presentations to round out your 2011 CPE requirements:

  • BVR’s Industry Spotlight Series returns on Thursday, Dec. 1, with R. James Alerding and Ronald E. Nielsen (both Clifton Gunderson) presenting Valuations in Agribusiness: Food Processing Companies and focusing on the operational nuances that valuing food processing companies raise.

Current transition options for BV practices

Many smaller or solo practitioner BV firms may miss the “merger mania” that’s currently sweeping the profession (see BVWire #110-2). There are many of these practices, most often “’single-shingle shops,” says John Borrowman (Borrowman Baker) “that face the same desire or need to transition ownership, but who aren’t going to be acquisition targets because of size, geographic location, or other constraints. These owners have an option to their ‘heir apparent’ approach,” he adds. “It’s not easy, and it’s not for everyone. But it can be a way to squeeze just a little more value out of a practice before you turn out the lights and lock the door for the last time.” Read Borrowman’s article, “Exit Options,” for more on the topic.

“Obviously, I’d like to hear from practitioners in that category and/or younger professionals who might like to jump-start their path to ownership,” Borrowman says. E-mail him here.

Court approves expert’s use of Business Reference Guide—which has just been updated online

In a recent California divorce, a joint expert valued the husband’s physical therapy practice between $450,000 and $550,000, using a multiplier of roughly .42 derived from the Business Reference Guide: The Essential Guide to Pricing a Business (BRG)(Business Brokerage Press), an excerpt of which he attached to his report. The trial court approved the source but adjusted the expert’s multiplier upward to 1.0 based on the firm’s historic growth rates, good location, and well-established clientele.

On appeal, the husband challenged the trial court’s reliance on the BRG for: 1) lack of foundation for the author’s expertise; 2) lack of evidence that the joint expert included the BRG’s method in his appraisal or that the court understood it; and 3) lack of support that the BRG method was “reasonable.” The husband also claimed that the negative factors underlying the joint expert’s selection of a lower multiplier were more credible. The appellate court rejected all these reasons, finding that the BRG was a reliable method used by an “undisputed” expert. Read the complete digest of In re Marriage of Bauer, 2011 WL 4337093 (Cal. App.)(Sept. 16, 2011) in the Dec. 2011 Business Valuation Update; the court’s unpublished opinion is currently posted at BVLaw.

New updates to BRG: In addition, BVR has just received the new Business Reference Guide online, in which 65% of the content was just updated—including its sections on Industry Trends, Rules of Thumb, Pricing Tops, General Information, and Expert Comments. Benefits of subscribing to the BRG Online include: 1) the ability to search for businesses using keywords and SIC codes; 2) access to continual updates throughout the year; 3) ease of adding BRG data to reports; 4) access to current industry reports, and more.

Does using more appraisers = better taxpayer outcomes?

New academic research suggests that there may be more behind a Tax Court estate tax valuation than simply “splitting the baby,” and it’s not just the increasing sophistication of the court, counsel, and BV experts. Using models from prior literature as well as an updated data set, the authors of the just-posted article “Asset and Business Valuation in Estate Tax Cases: the Role of the Courts” investigated “whether there are certain factors related to the case, the judge, and the economic environment that might influence the judge’s decision.”

What they found: “Evidence . . . suggests that the number of appraisers used by the taxpayer, the gender of the judge, the type of asset being valued, and the size of the U.S. deficit are related to the decision of the court,” conclude Professors Mark Jackson, Sonja Pippin, and Jeffrey Wong, all from the University of Nevada (Reno), who examined 152 decisions from 1986 through 2009. “The court cases indicate that judges sometimes reject the credentials of the taxpayer’s appraiser and other times that of the IRS’s expert,” the authors noted; “we therefore believe that on average each side’s experts are given equal value.”

BVR increases its coverage of IP management and valuation
Intellectual property is the largest asset in many valuations—so the issue is demanding greater scrutiny and time. That’s why BVR is launching its new monthly reporter, IP Management & Valuation. IPMV focuses on valuation for the appraisers, lawyers, and “chief IP officers” who must identify, value, protect, and grow IP assets.  

The premiere issue includes articles by top experts on:

  • Indirect profits from copyright infringement;
  • Fundamental principles of patent value;
  • 14 “warning signs” when valuing your IP portfolio;
  • Exclusive analysis of the most significant recent IP litigation, including the Oracle/SAP decision;
  • A new professional certification in intangible asset valuation; and
  • The effective dates for the America Invents Act: what does patent reform mean for your assets?

BVWire subscribers can get the current issue of the IPMV for free. For more information and to download the current issue, click here.

DOL ‘hints at’ making ESOP appraisers fiduciaries

In a recent press release, the Department of Labor (DOL) announced that it would re-propose the regulation that would redefine the definition of ERISA fiduciaries. “This press release hints at leaving the provision making ESOP appraisers ERISA fiduciaries when they value stock being acquired by a private company,” says a new post by Mercer Capital, which also contains a reprint of the DOL release

IRS reissues proposed regs on alternative valuation date

The Internal Revenue Service has just issued new proposed regulations on electing an alternate valuation date for an estate, withdrawing earlier regulations issued in 2008. According to a published notice in the Federal Register (Nov. 18, 2011), “the proposed regulations will affect estates that file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and elect to use the alternate valuation method.” The notice also announces a public hearing on the proposed regulations, with comments due by Feb. 16, 2012.


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Copyright © 2011 by Business Valuation Resources, LLC
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