IASB ‘obsessed’ with fair value, and other myths 

Among the more popular myths surrounding the International Accounting Standards Board (IASB) is “that we are obsessed with fair value,” says Chairman Sir David Tweedle, in the current issue of Insight (see below).  That obsession is “grossly overstated,” he insists.  The Board’s primary efforts this year have focused on deciding the appropriate mix between historical cost and fair value on balance sheets.  “The only major fair value changes we’ve brought about are the valuation of share options and the fair value option.”  Convergence is another myth, he says.  In reality, the Board has been working on how to reduce or eliminate the gap between IFRS and US GAAP—which, Tweedle predicts, has a fair chance of happening next year.  “That is a massive change…A globalised accounting language will bring benefits to everyone.”

That’s in keeping with the newly revamped and revised Insight, the quarterly journal published by the IASB and the IASC Foundation.  “Truly global capital markets require a common language to articulate business performance,” say the editors. “Yet we haven’t always made it easy for those outside of the standard-setting world to understand, and most importantly to engage in the extensive rounds of consultation we undertake.”   By exploring some of the “bigger picture themes and concepts,” the expanded Insight hopes to “raise awareness…amongst a broad range of constituencies both within and outside the standard-setting world.”

Lack of a national BV standard may increase liability

Our ongoing survey on proposed “united” BV standards has set a record for number of responses received—sixty-five, so far.  The high level of passion and commitment to the BV profession also comes with some hyperbole.  “If the major BV organizations do not end their petty bickering,” says one respondent, “we are all going to end up puppets dancing on the strings of a bunch of regulators who do not have a clue what is required in the BV arena.”   Separate standards “pit professional versus professional,” says another, and can make appraisers subject to “unwarranted attacks” from attorneys, regulators, and their peers.  “This is ridiculous!” agrees another.  “We need to get one set of NATIONAL standards and quit competing with each other.”

One respondent points out the costly pitfalls of non-consensus, alleging that a Massachusetts business appraiser recently faced malpractice claims for failing to comply with USPAP.  His defense: He’s not an ASA (the only organization to require USPAP compliance).  An attorney specializing in complex matrimonial cases agrees.  “The diversity of and disparity among BV standards…provide fertile ground for cross-examination,” he says.  “Many business appraisers try to assert compliance with all the standards, not realizing the important differences among them.  This can be a fatal mistake when facing a competent attorney who understands BV.”

Is the problem truly intractable?  “You’ve already sort of lost that battle,” says one commentator.  “The solution is to respond with current, useful education and guidance, not to grasp at controlling the ‘standard’ definitional power strings.”   “Further,” adds Jim Alerding (Clifton Gunderson, LLP), “those who believe that having the BV community agree upon a single standard will solve the problem and make the FASB go away are living in Fantasy Land.”   Now that the survey has successfully aired the problem—perhaps the focus should be on potential, “real world” solutions.  Email your suggestions to the editor.  And do look for all survey comments to appear in the next (November 2007) Business Valuation Update™. 

Is there any future for FLPs?

In 1994, an eighty-five year-old widow transferred California beachfront property into a family limited partnership (FLP)—but failed to transfer the underlying mortgage.  Even though she remained personally liable on the debt, the FLP made substantial monthly payments on the loan as well as her other living expenses, but failed to debit her partnership account until after her death in 1997.  These are just some of the “bad facts” of Estate of Bigelow v. Comm’r (9th Circuit, September 17, 2007), the most recent in an ever-growing string of cases that casts doubt on the viability of FLPs as an estate planning tool.

Notably, the Bigelow estate tried to fit within the IRC §2036(a) exception by asserting that the transfer of property to the FLP was a “bona fide sale for full and adequate consideration.”  The Commissioner argued that the estate couldn’t make that claim and also claim discounts for marketability, too, but the Ninth Circuit declined to adopt the “per se” rule.  That is, it followed the Third and Fifth Circuits and the Tax Court, which hold that “the dissipation of value resulting from the transfer of marketable assets to a closely held entity will not automatically constitute inadequate consideration” (emphasis added).  Instead, the criteria for the “bona fide sale” exception are interrelated with the inquiry into the FLP’s “legitimate” (non-tax) business purpose.  For a copy of an abstract of Bigelow, click here.  The full-text court opinion is available to subscribers of BVLaw™, the most comprehensive database of BV-specific case law—over 2600 cases to date, and still growing.

Another sign of the ‘public disclosure’ times…

As of August 1, 2007, Pink Sheets (PS) created a new categorization system to alert investors about the ability and willingness of individual OTC (Over-the-Counter) issuers to provide adequate public disclosure in a timely manner.  “We believe categorizing securities by their level of disclosure will improve investor access to information and greatly enhance the capital formation process,” says the PS website.  By placing a colored marker on each company's quote page and wherever its trading symbol appears on the site, “investors will be able to quickly determine the level of information a company provides to the marketplace, or if it there is spam or other questionable activities.”  The color-key includes: a pink “PS” icon for those companies that keep current with regulators, a yellow “yield sign” for those that file limited information, a red stop sign for those “not able or willing” to disclose information, and a black skull and crossbones for those that raise public interest concerns.

How’s the system working so far?  Nearly 100 companies have started providing information that they weren’t providing before the introduction of the categories, according to Pink Sheets’ CEO, Cromwell Coulson.  Nearly 75% of PS’ August trading volume involved companies that were current on their disclosures, while 5% of trading took place in companies that provided no information.  If companies don’t provide information, “[they’re] going to look questionable,” Coulson recently told PIPEWire™ (published by DealFlow Media.)  Starting next year, the category markers will start appearing on the service’s data feeds.

Elegant new book on BV, grounded in real-work markets

Mercer Capital has just issued the second edition of Business Valuation: An Integrated Theory, a “fairly elegant little book on business valuation,” according to author Z. Christopher Mercer, which is also “grounded in the real work of market participants.”   The new edition, co-authored by Travis W. Harms, addresses the needs of finance, legal, accounting, and appraisal professionals to articulate and apply current BV concepts to enhance business value, including:

• The "GRAPES of Value"—Growth, Risk and Reward, Alternative Investments, Present Value, Expectations, and Sanity.
• The relationship between the Gordon Model and the discounted cash flow model.
• The basis for commonly applied (but commonly misunderstood) valuation premiums and discounts.
• A practical perspective on the analysis of potential business acquisitions.
• The ability to defend and explain the valuation of S corporations.

For more information, and to order a copy, click here.

E-Commerce valuations at 100 times earnings?

We are currently inside another valuation bubble—this one for e-commerce enterprises, says a new posting on WebProNews, “where it’s not unreasonable for [online properties] to sell for as much as 100 times earnings.  Just two years ago,” the blog continues, “a half-billion dollars for MySpace seemed a bit on the frivolous side.  But now it's obvious that News Corp. got in on something before the rest of the media world caught on, especially as Facebook, with a fraction of the audience, demands a steeper and steeper price.”

The real question: “Are we or are we not looking at (or standing within) the next dotcom bubble?”  Or to put it another way, are we looking at the most current playing out of Mike Pellegrino’s “fools’ market value” premise of value?  (See BVWire™ #59-5).  “What people don’t want to look at is the value of these brands and how inexpensive they are to run compared to traditional media,” says the WPN blog.  “The margin leverage is tremendous.”  The site poses the other “$64 million” question (or is that $64 billion by now?): Is 100 times earnings reasonable?  Keep those valuation comments coming, to the editor.

Company-specific risk is (again) on ASA COC curriculum

Once again Keith Pinkerton and Pete Butler will be addressing the Cost of Capital seminar taught by Roger Grabowski just prior to the ASA Advanced BV Conference in San Diego, October 29-31.  Their subject: quantifying company-specific risk, the empirical model they’ve published in the BVU and Business Valuation Review.  For those who have yet to review the model, it’s still a “top choice” available among the BVResources free valuation downloads.  And for those who have yet to register for the ASA BV conference and its top-of-the-profession presentations and networking opportunities, click here.  Be sure to visit the BVR booth, where we hope to have Pinkerton/Butler’s new software on quantifying company-specific risk available for free trials and full demonstrations by the authors.  Stay tuned…