There was a lot of interest in the audience on calculation engagements, which was the lead-off presentation by Jim Alerding (Alerding Consulting LLC) at a full-day conference sponsored by the Connecticut chapter of the National Association of Certified Valuation Analysts (NACVA). “This topic has been generating a lot of buzz lately,” says Alerding, who was a co-author of the AICPA’s standards for valuation services, SSVS1 (VS100).

Many questions: Most of the audience members use calculation engagements, but they still had a number of questions, which indicated it’s still a murky area. For example, should the expert include the methods being used in the engagement letter? Yes, that’s a good idea, so that the client understands what you’ll be doing. Another question: Does the IRS accept calculation reports? It has been known to accept them for estate and gift tax purposes in some jurisdictions although it never has confirmed this officially (so you need to know about your specific jurisdiction). Alerding noted that the IRS experts use calculations themselves. One audience member noted that the IRS told him that, if a discount is used, there needs to be detail about that in the report.

There are places where you should not use calculation reports, such as for ESOPs. “If you use them for ESOPs, you should be ‘put away,’” says Alerding. “And the DOL will do it!” As for litigation, calculation reports should in general not be used, although the courts have accepted them in some cases. But you have to “know your jurisdiction,” he says. You also have to know the facts and circumstances of prior cases that accepted calculations. For example, in a recent case, a calculation report was accepted “by default” because the other side had no expert valuation at all, so this is not a validation of their use in court. Alerding, who has testified over 400 times, advises that you put a provision in your engagement letter that, if the matter goes to litigation, you will do a full valuation.

Watch out: One expert asked: If I don’t have enough information because the adverse party prevented me from getting it, do the standards provide that I can do a calculation and not a full valuation? “There is no such provision,” says Alerding, “but there is no prohibition either.” If you go that route, you do so at your own risk, he says, pointing to a case that had those exact circumstances and the court disqualified the expert. So what should the expert have done? “He should have walked away from the engagement,” Alerding says.

Audience members also asked about the language to use at the end of the calculation report. Can you say: “My opinion of the calculated value is …”? Yes, you can use the word “opinion,” but you cannot say “my conclusion of value is …,” which is used for valuation engagements.

For more information, see the AICPA’s FAQs on calculation engagements, which Alerding co-wrote. Also, Alerding did a webinar for BVR, Calculation Engagements: Risks, Rewards and New Guidance, in which he goes through the FAQs as well as other matters on the uses of calculations.

Nonowner spouse obtains discovery of valuation-related info from owner spouse's medical practice

A Florida divorce case prompted an important discovery ruling from the appellate court as to a nonowner spouse’s right to access documents and information regarding the owner spouse’s interest in a large medical practice. The wife was one of 75 owners in a large medical practice that had 200 physicians. After she filed for divorce, the husband filed a counterpetition seeking equitable distribution of the marital assets and alimony. He subpoenaed the medical practice, which was not a party to the proceedings, to obtain a number of documents, including financial records, arguing this information was necessary for him to determine the value of the wife’s ownership interest and support his claim.

The practice filed a motion for a protective order, arguing the wife’s ownership interest was predetermined by the practice’s operating agreement, which required the use of book value, as determined by the business’s accountant. The husband countered the operating agreement only applied to specific circumstances, which did not occur in the case of divorce. He was entitled to information that assisted in determining the actual value of the wife’s interest, using a fair market valuation or other reasonable method.

The trial court ruled in favor of the medical practice, but the husband persuaded the Court of Appeal to intervene and instruct the trial court to order the practice to produce the requested documents. The appellate court agreed with the husband that none of the circumstances existed that “would irrefutably define the value of Wife’s interest in [the practice] by an accountant’s determination of book value of the practice.” If the wife’s ownership interest was a marital asset, the trial court had to determine the value of the interest in its equitable distribution analysis. Information regarding the value of the medical practice, which may shed light on the value of the wife’s ownership interest, was discoverable “as those documents may themselves be admissible or lead to the discovery of admissible evidence,” the Court of Appeal said.

It also pointed out that book value, as the practice defined it, did not include accounts receivable and the value of goodwill. The practice’s expert witness testified that “book value” was not the same as fair market value.

The Court of Appeal ordered that the information be used only for the divorce proceedings and accessed only by the parties, their counsel, and their financial experts.
A digest of Hall v. Hall, 44 Fla. L. Weekly D 1543; 2019 Fla. App. LEXIS 9265; 2019 WL 2477964 (June 14, 2019), and the court’s opinion, will be available soon at BVLaw.

Deadline looms to share your views on goodwill amortization vs. impairment

Comments are due soon—October 7—on the FASB’s Invitation to Comment (ITC) on how to account for certain identifiable intangible assets acquired in a business combination. Should annual goodwill impairment tests be done away with for public companies? Should other assets be subsumed into goodwill? The FASB is asking these questions and others—over two dozen in all—as it solicits feedback on this important issue.

Mohini Singh, director of the financial reporting policy group at the CFA Institute, said that her organization feels that the FASB proposal will go through “unless there is a little bit of a revolution from the user and investor community.” The CFA Institute was “very much against” the FASB’s Private Company Council allowing private companies to amortize goodwill, she says. Also, certain identifiable intangibles would not have to be broken out separately from goodwill in a business combination, such as noncompete agreements. The CFA Institute felt that having different rules for different companies would decrease comparability. And, while one of the ideas was to decrease complexity for private companies, the CFA Institute felt it would actually increase complexity for users of financial information because of the decrease in transparency. The CFA Institute’s objections are fully laid out in a position paper on this topic, and it is also very much against the proposal to allow public companies to amortize goodwill.

Also of note is a first in a series of articles from the IVSC, “Is Goodwill a Wasting Asset?” The article concludes that, after a functional analysis of the components of goodwill, “the reasonable conclusion is that substantially all of goodwill is indefinite in nature.” The notion that goodwill is a wasting asset would be “inconsistent with the premise of going concern inherent in the consideration paid to acquire nearly all businesses.”

Disconnect in thoughts on PCAOB performance

The Center for Audit Quality (CAQ) reports that 83% of U.S. retail investors are confident that public-company auditors are effective in their investor protection roles, according to its 2019 Main Street Investor Survey. On the other hand, a report from the Project on Government Oversight (POGO), an independent watchdog, says that the PCAOB has been too lenient with the Big Four. In its 16-year history, only $6.5 million in fines have been issued when it could have fined the audit firms more than $1.6 billion, according to the POGO report, “How an Agency You’ve Never Heard of Is Leaving the Economy at Risk.” The PCAOB is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and other issuers. Of interest to valuers are the PCAOB’s findings on audit deficiencies in fair value for financial reporting, which recently have been in the areas of financial instruments and business combinations.

Extra: The House has passed a bill that, if signed into law, would establish a new whistleblower program at the PCAOB that would reward people for information about potential audit rule violations and prohibit retaliation against those who share it.

There is not a tremendous amount of study on the business value of live streaming in the digital economy, but a new paper on this has some interesting observations from the standpoint of online retail. The paper is “Everyone Can Be a Star in the Digital Economy: Quantifying the Business Value of Live Streaming Technology in Online Retail.” One finding (not surprising) is that “adopting live streaming significantly boosts online product sales.” The authors acknowledge limitations of most empirical studies, including their own, but they give a good deal of backstory on live streaming and say that future research is needed.

Someday, a “workforce engagement adjustment” will be made to the calculation of the value of an assembled workforce, say experts in an article in the October 2019 issue of Business Valuation Update. In the meantime, all valuation experts should be taking this factor into account for any business valuation when assessing specific company risk.

We all know the phrase “people are a company’s most valuable asset” and appraisers know how to put a value on a “workforce in place,” but does that really tell the whole story? It does not! Yes, you can go through a cost-to-replace exercise for ASC 805 purposes, and that’s fine and acceptable. But you need to go beyond the calculations and think about how the nature of the workforce drives company value. The current methodology for estimating the fair value of an assembled workforce does not allow for workforce engagement. “Right now, we are a little bit limited with the tools and methodologies that we have to work with,” says Dave Bookbinder. “We can’t actually make those adjustments. But, somewhere down the road, I do believe we will be able to incorporate the engagement factor in our assembled workforce calculation.”

Bookbinder is a valuation professional who has conducted valuations of the securities and intellectual property assets of companies. Among the many types of intangible assets that he has valued are human capital assets (people), and he is the author of The NEW ROI: Return on Individuals. The article goes into detail about what to think about when determining the contribution people make to the value of a company.

The Advisory Forum Working Group (AFWG) of the International Valuation Standards Council has launched a survey to identify the most common differences between business valuation for reporting purposes around the world and potential difficulties for achieving consistency with IVS, the global standards. The responses will be anonymous and will be grouped into key segments such as report writing, report disclosures, report content, valuation conclusion, and others. The results will be presented at the IVSC’s Annual General Meeting in Singapore (October 7-9), which will be attended by leading valuation specialists and valuation professional organizations (VPOs). To take the survey, click here.

BV movers ...

People: Anand Trivedi, vice president in Duff & Phelps’ Business Valuation and Appraisals practice, was elected as the secretary of the International Virtual Chapter (IVC) of the American Society of Appraisers … Johnnie White, recently named CEO of the American Society of Appraisers, will make a key presentation, “Ideal Framework for the Valuation Profession,” at the Global Valuation Summit organized by the Institution of Valuers and held in conjunction with the 50th Indian Valuers Congress October 11-12 at the Jawaharlal Nehru Stadium in New Delhi, India … Dustin Scott, CPA, EA, a manager at McGregor & Co. LLP in South Carolina, has earned the Certified Valuation Analyst (CVA) designation from the National Association of Certified Valuators and Analysts (NACVA).

Firms: Houlihan Lokey was once again named Best Valuation Firm for Hard to Value Assets at the 2019 HFM U.S. Hedge Fund Services Awards; this is the third time the firm has won this award and the fourth time in four years that HFM has honored Houlihan Lokey for its outstanding valuation capabilities … New York-based EisnerAmper announced that CPA firm Imowitz Koenig & Co. and real estate fund advisory firm Real Estate Systems Implementation Group, have joined the firm, adding 14 partners and a staff of 125 to the firm … New York-based CohnReznick has expanded its cybersecurity and privacy practice by establishing a privacy advisory group … Thomas Howell Ferguson P.A. CPAs (Tallahassee, Fla.) has acquired the Bainbridge, Ga., firm, Dowdy & Whittaker CPAs.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• DCF Modeling for Early Stage Enterprises: A Fair Value Update (October 2), Antonella Puca (BlueVal Group LLC), Andreas Dal Santo (BlueVal Group LLC), and Shilpa Chandra (BlueVal Group). Part of BVR’s Special Series on Fair Value.
  
  How to address a number of challenging issues that arise with a DCF analysis for early-stage firms, such as cost of capital and investor commitments.
  
  

• Deriving the Black Scholes Option Pricing Equation (October 10), with Gary Schurman (Applied Business Economics).
  
  Hear about an intuitive, albeit unconventional, way to derive the Black-Scholes option pricing model.