BVR Logo October 23, 2019 | Issue #205-4

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

D&P lowers its normalized risk-free rate to 3.0%

Duff & Phelps has decreased its U.S. normalized risk-free rate from 3.5% to 3.0% effective Sept. 30, 2019, the firm says in a statement. This new rate, used in conjunction with D&P’s equity risk premium of 5.5% (reaffirmed), implies a “base” U.S. cost of equity capital estimate of 8.5% (3.0% + 5.5%), the firm says.

Rates of choice: In a recent BVWire survey, most respondents say they use the spot yield on Treasury bonds for their risk-free rate when developing an estimate for the cost of capital. The majority (58%) use the 20-year spot yield, and the rest (9%) use the 10-year spot yield. A quarter of respondents use the D&P normalized risk-free rate, and the remainder use something different (e.g., a 30-year spot yield) or a custom rate. Most respondents who use the spot yields get their information right from the U.S. Treasury website.

The concept of normalizing the risk-free rate emerged around the time of the financial crisis and is generally based on historical rates. A number of thought leaders strongly disagree with the use of a normalized rate, such as Chris Mercer of Mercer Capital (see his post on this topic) and Professor Aswath Damodaran of the New York University Stern School of Business, who writes that “a valuation is an assessment of the future as of right now, and you have to use the current risk-free rate.”

Some courts prefer back-of-the-envelope calculations, expert says

Although some appraisers are categorically opposed to calculation engagements, it is not unusual for courts to want a back-of-the-envelope calculation, a veteran BV expert says.

David Shindel (ShindelRock), a credentialed valuator and master analyst in financial forensics, recalls recent litigation involving a Las Vegas adult entertainment business. A number of employees (defendants) carried out a scheme to overcharge customers’ credit cards, which led to the business’s being shut down and having to pay chargebacks to the customers’ credit cards, besides incurring professional fees to investigate the fraud and negotiate an agreement with law enforcement.

The company sued the defendants for loss of business value. The shareholders retained Shindel, who has extensive experience valuing adult cabarets and published the only peer-reviewed article on related zoning issues, to develop a damages calculation. The defendants never appeared in court and did not offer opposing expert testimony.

The court expressly asked Shindel to keep his damages assessment short and simple. Shindel presented a before-and-after calculation, taking the average gross receipts for the prior three years and multiplying the number by 85% of gross sales based on industry standards. The court accepted the testimony, which Shindel was able to give via telephone. The report to the court was a page and a half long with two attachments. “The key element was that I had to be credible with the court,” Shindel says.

A second case, in which the court sealed the record, also involved an adult cabaret. The business was destroyed based on faulty repair work by a utility company. The latter was willing to pay for damages to the real estate but not the business as a going concern and goodwill, arguing, among other things, the business had not been profitable in prior years. The business retained Shindel, who, through an analysis of information specific to the business, the site on which it was located, and the industry, was able to present the court with a calculation of expected profits as of the date of the defendant’s wrongful conduct. In this case, too, the court asked for a back-of-the-envelope calculation. It accepted Shindel’s damages determination.

Shindel says throughout his career serving as a testifying expert he has encountered judges who wanted him to keep his value or damages calculations brief. “Many times, courts want something simple,” he notes.

Vianello offers free e-book on empirical research regarding DLOM

“When I entered the valuation field, I quickly became very dissatisfied with the available means of estimating DLOM,” writes Marc Vianello (Vianello Forensic Consulting LLC). His dissatisfaction extended to the restricted stock studies, pre-IPO studies, transactional databases, and option-based models. “After all, there were no empirical studies,” he says. He conducted his own study, and you can read about it in his free e-book, Empirical Research Regarding Discounts for Lack of Marketability. The book has intros by Francis A. Longstaff, Ph.D. (UCLA), who conducted a study in 1995 that relies on stock options to estimate the DLOM, and Michael Gregory (Michael Gregory Consulting), former IRS engineering territory manager and champion of the IRS DLOM Job Aid.

FASB delays several sets of accounting standards

The FASB has voted to delay the effective dates for private companies and certain other entities for the standards on accounting for leases, credit losses (known as CECL), and hedging. The FASB also extended implementation deadlines for a standard that requires insurers to revise how they value long-term insurance contracts. As a result of the delays, private companies and nonprofits will have to implement the hedging and leasing standards for the fiscal year and interim periods beginning after Dec. 15, 2020. Small public lenders, public lenders that don’t file with the SEC, and private and nonprofit lenders will have to implement CECL for the fiscal year and interim periods beginning after Dec. 15, 2022. Large public banks (defined as all SEC-filing lenders minus small-business entities) were unaffected and will have the same deadline of the fiscal year after Dec. 15, 2019. The delayed implementation of the insurance standard will affect all insurers. SEC-filing insurers will have until the fiscal year after Dec. 15, 2021, while all other insurers will have until the fiscal year after Dec. 15, 2023.

New resources amass regarding valuing financial instruments

The valuation profession is responding to the concerns by financial regulators and others around the world about the quality and consistency of financial instrument valuations. We present below several of the recent resources that have emerged, including some new credentialing, that are designed to improve this area of practice.

In collaboration with RICS and IVSC, the iiBV recently released its Valuing Financial Instruments video webinar. The panel includes Justin Burchett (managing director, Stout New York); Srividya Gopalakrishnan (managing director and Southeast Asia leader, Duff & Phelps, Singapore); Kumar Dasgupta (technical director of financial instruments, IVSC London); and Nicolas Burdeau (partner, Deloitte, Paris). It’s moderated by Michael Badham, iiBV executive director.

Meanwhile, IVSC’s recently appointed Financial Instruments Standards Board has published an Agenda Consultation. The board has received some input but is still seeking feedback regarding the approach it should take and the prioritization of its work. You can download the consultation paper if you click here. No effective set of international valuation practice standards for financial instruments have yet been generally adopted. Even a common definition of the term “complex financial instruments” is elusive. This has resulted in both inconsistent and sometimes low-quality valuation practices.

The Public Company Accounting Oversight Board (PCAOB) has issued four documents that provide guidance on the new requirements for auditing accounting estimates and the auditor’s use of a specialist, which includes valuation experts. One of the documents is “Auditing the Fair Value of Financial Instruments.” The new requirements are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. For more information, the PCAOB has created two implementation pages on its website for the new estimates standard and amendments for the auditor’s use of the work of specialists.

The American Institute of CPAs has a newly launched credential, Certified in the Valuation of Financial Instruments (CVFI). A white paper explains that the new credential is not designed exclusively for CPAs but for any valuation professional who performs fair value measurements of financial instruments for financial reporting purposes. To obtain the credential, qualified candidates must meet education requirements covering the CVFI Body of Knowledge, an exam based on the Financial Instruments Performance Framework and the Body of Knowledge, and more than 3,000 hours of experience related to fair value estimates for financial instruments in the five years preceding the application.

Also, the AICPA will host a meeting of The Appraisal Foundation’s Appraisal Issues Task Force (AITF) on November 6 from 9 a.m. to 12 noon, which coincides with the AICPA’s Forensic and Valuation Services Conference in Las Vegas. The AITF is a voluntary group of valuation professionals who specialize in the field of valuation for financial reporting and seek to improve practice in this area. Conference attendees may attend the AITF meeting.

The International Association of Certified Valuation Specialists, in conjunction with the Center for International Business Valuation, has added an advanced level to the International Certified Valuation Specialist (ICVS) credential. Valuators can now earn the ICVS with Advanced Studies in Financial Instruments (ICVS-A). The ICVS-A designation can be earned along with the initial ICVS or can be added to enhance a current ICVS credential. The ICVS-A designation requires an understanding of valuation techniques for various financial instruments, ranging from basic securities to complex derivative constructs. The inaugural live training, presented with the Southeast Chapter of Business Appraisers, will be held in Orlando, Fla., on December 16, December 17, and December 18. Business valuators with a credential such as the ICVS, ASA, ABV, CICBV, BCA, or CVA are welcome to attend. Upon completion of the training program, students can participate in the ICVS-A credentialing exam. For more information, there’s an ICVS-A brochure; to register for the training, click here.

Significant transfer pricing case in Australia

In a major victory for the taxpayer, the federal court in Australia found in favor of Glencore, a mining firm, and ruled that the terms between the Glencore Australian subsidiary and its Swiss trader parent for the sale of copper concentrate were within an arm’s-length range. In a KPMG analysis of the case, the decision “reinforces that evidence is key and taxpayers should direct their attention to gathering a combination of evidence” that includes an analysis of comparable transactions that are characteristic of typical arm’s-length arrangements and “via independent expert opinion where issues are more complex.” The case is Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432.

BV movers ...

People: Geoff Malcolm, CFA, has joined AltaView Advisors’ New York City office as a vice president … The National Association of Certified Valuators and Analysts (NACVA) has named Matthew B. Cassedy, MBA, CBA, CVA, CMEA, MAFF, president of Analytic Business Appraisers LLC (Scottsdale, Ariz.), outstanding member (third quarter 2019) … Samantha L. Albert, senior financial analyst at Memphis-based Mercer Capital, has earned the right to use the Accredited Senior Appraiser (ASA) designation in the business valuation discipline by the American Society of Appraisers.

Firms: Campbell, Burkart & Sage, CPAs, PC and Ketel Thorstenson LLP, both in Rapid City, S.D., have announced a merger, which will take effect on November 1; the combined firm will operate as Ketel Thorstenson LLP … Indianapolis-based Somerset CPAs PC has acquired another firm in the area, Merrill & Thoman LLP; the acquisition adds two partners to the firm, bringing its total number of partners to 37 and employees to 225.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Demystifying the Complex World of Discounts for Lack of Marketability (October 24), with Pasquale Rafanelli (Empire Valuation Consultants).

    Valuation experts have almost 75 methods to choose from for estimating a discount for lack of marketability (DLOM). This session will go over the most prominent methods, when they should be applied, and how to apply them.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

LinkedIn Icon
Twitter IconYouTube Icon

Business Valuation Resources, LLC
111 SW Columbia Street, Suite 750, Portland, OR 97201
1-503-479-8200 |
© 2019. All rights reserved.