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January 04, 2012

International Private Equity and Venture Capital Valuation Guidelines

International Private Equity and Venture Capital Valuation Guidelines

The International Private Equity and Venture Capital Valuation Guidelines were developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) and were launched in March 2005 to reflect the need for greater comparability across the industry and for consistency with IFRS and US GAAP accounting principles. Valuation guidelines are used by the private equity and venture capital industry for valuing private equity investments and provide a framework for fund managers and investors to monitor the value of existing investments. The new guidelines are based on the overall principle of ‘fair value’ in order to be consistent with IFRS and US GAAP.

AFIC, BVCA and EVCA also created an independent board (International Private Equity and Venture Capital Valuation Board – IPEV Valuation Board) reporting and accountable to a general assembly composed of all the endorsing associations to manage the evolution of the guidelines going forward.

International Private Equity and Venture Capital Valuation Guidelines - Edition September 2009- New layout August 2010 Open PDF file (2,3mb)

IPEV Valuation Board

Ask a question about the International Private Equity and Venture Capital Valuation Guidelines

IPEV Valuation Board News

Members of the board Open PDF file (317kb)

List of Endorsing Associations

Frequently Asked Questions


IPEV Board

The board monitors market practices in the use of the guidelines. It also proposes amendments to the guidelines following any relevant changes to accounting standards and market practices and formally reviews the guidelines every three years. The board has an advisory role and gives guidance on the application of the guidelines to all stakeholders in the private equity and venture capital industry including practitioners, investors, regulators and auditors.


IPEV Board News

If you want to be notified of changes on this website please subscribe on this page

IVSC and IPEV to co-operate on valuation standard-setting - 7 October 2011 Open PDF file (32kb)

Meeting of the 30th of November 2010 Open PDF file (190kb)

IPEV Board's comment Letter on the IASB's proposed Measurement Uncertainty Analysis Disclosure for Fair Value Measurements and the FASB's proposed Accounting Standards Update (ASU) "Fair Value Measurements and Disclosures (Topic 820)" – 7 September 2010 Open PDF file (100kb)

IPEV Board's comment Letter to International Valuation Standards Board on Proposed New International Valuation Standards – 3 September 2010 Open PDF file (52kb)

Meeting of the 2nd of June 2010 Open PDF file (189kb)

3nd IPEV General Assembly, web conference of the 20th of January 2010 Open PDF file (96kb)

IPEV Board's comments on the IASB's Exposure Draft "Fair Value Measurements" - 1 October 2009 Open PDF file (41kb)

IPEV Board's comments on the IASB's Exposure Draft "Financial Instruments: Classification and Measurement" - 15 September 2009 Open PDF file (24kb)

Press release of the 9th September 2009 Open PDF file (39kb)

Update on the 2009 IPEV Guidelines Open PDF file (18,9kb)

CONSULTATION for the new edition of the IPEV Guidelines - Answer required by 12 June 2009 Open PDF file (571kb)

IPEV Board's comment letter on IASB Exposure Draft ED 10 Consolidated Financial Statements - 25th of March 2009 Open PDF file (34kb)

Meeting of the 20th November 2008 Open PDF file (28kb)

Press release of the 20th November 2008 Open PDF file (23kb)

Press release of the 17th March 2008 Open PDF file (31,8kb)

Meeting of the 6th of March 2008 Open PDF file (26,7kb)

2nd IPEV General Assembly, web conference of the 21st of February 2008 Open PPT file (149kb)

Meeting of the 20th of September 2007 Open PDF file (25.4kb)

IPEV Valuation Board's comments on the IASB's Discussion Paper "Fair Value Measurements" - 30th of April 2007 Open PDF file (72,6kb)

Meeting of the 9th of March 2007 Open PDF file (32,7kb)

1st IPEV General Assembly, web conference of the 15th of February 2007
Open PPT file (376kb)

Press release of the 15th November 2006 Open PDF file (42,4kb)

Meeting of the 20th of October 2006 Open PDF file (23,5kb)

Press release of the 13th of July 2006 Open PDF file (40,5kb)

Meeting of the 8th of March 2006 Open PDF file (19,7kb)

Press release of the 16th of November 2005 Open PDF file (39,7kb)

Meeting of the 5th of October 2005 Open PDF file (28,3kb)


List of the endorsing associations

The International Private Equity and Venture Capital Valuation Guidelines developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) have been endorsed by the following regional and national associations.

These include:

  • AFIC - Association Française des Investisseurs en Capital
  • AIFI - Italian Private Equity and Venture Capital Association
  • AMEXCAP - Mexican Private Equity and Venture Capital Association
  • AMIC - Association Marocaine des Investisseurs en Capital
  • APCRI - Portuguese Private Equity and Venture Capital Association
  • APEA – Arab Private Equity Association
  • ASCRI - Spanish Private Equity and Venture Capital Association
  • ATIC – Tunisian Venture Capital Association
  • AVCA - African Venture Capital Association
  • AVCAL - Australian Private Equity and Venture Capital Association Limited
  • AVCO – Austrian Private Equity and Venture Capital Organization
  • BVA - Belgian Venture Capital & Private Equity Association
  • BVCA - British Venture Capital Association
  • BVK - German Private Equity and Venture Capital Association e.V.
  • CVCA – Canada’s Venture Capital and Private Equity Association
  • CVCA - China Venture Capital Association
  • CVCA - Czech Venture Capital and Private Equity Association
  • DVCA - Danish Venture Capital Association
  • EMPEA - Emerging Markets Private Equity Association
  • EVCA - European Private Equity and Venture Capital Association
  • FVCA - Finnish Venture Capital Association
  • GVCA - Gulf Venture Capital Association
  • HKVCA - Hong Kong Venture Capital Association
  • HVCA - Hungarian Venture Capital and Private Equity Association
  • ILPA - Institutional Limited Partners Association
  • IVCA - Irish Venture Capital Association
  • LAVCA - Latin American Venture Capital Association
  • LPEQ - Listed Private Equity
  • LVCA - Latvian Venture Capital Association
  • NVCA - Norwegian Venture Capital & Private Equity Association
  • NVP - Nederlandse Vereniging van Participatiemaatschappijen
  • NZVCA - New Zealand Private Equity & Venture Capital Association
  • PPEA - Polish Private Equity Association
  • Réseau Capital – Québec Venture Capital and Private Equity Association
  • RVCA - Russian Private Equity and Venture Capital Association
  • SAVCA - Southern African Venture Capital and Private Equity Association
  • SECA - Swiss Private Equity and Corporate Finance Association
  • SLOVCA - Slovak Venture Capital Association
  • SVCA – Singapore Venture Capital & Private Equity Association
  • SVCA - Swedish Private Equity and Venture Capital Association

Some of the endorsing associations have translated the IPEV Guidelines into local language. In the event of any inconsistency or ambiguity in relation to the meaning of any word or phrase in any translation, the English text shall prevail.

Endorsement as of 31st January 2011

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Business Valuation, DLOM and

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1504134

Electronic copy available at: http://ssrn.com/abstract=1504134

Business Valuation, DLOM and

 

Daubert:

The Issue of Redundancy

 

 

 

by

Robert Comment, MBA, PhD *

First posted January 18, 2010

Last revised, January 7, 2011

(Forthcoming in the

Business Valuation Review)

Abstract

 

 

Business valuations are a common subject of dispute in tax and divorce litigation, with the

valuation consequences of private‐company status of a closely held (often family) business

being especially contentious. It is not well known that core valuation methodologies such

as DCF analysis have the effect of discounting the future cash flows of small businesses

substantially, generally by 40% to 60%, dollar‐for‐dollar, for lack of size alone. Because

there is a strong empirical relation between size and liquidity, there is a great likelihood

that any supplemental discounting for illiquidity will be redundant and entail double

discounting. Accordingly, the large illiquidity discounts or DLOMs that are accepted

practice in business valuation and that have been embraced by many judges presumptively

violate the

Daubert requirement for reliability.

* The author can be contacted at bobcomment@msn.com, He has taught business valuation in

several MBA programs, and has appeared in federal and state courts as an expert witness, albeit not

on the topic of business valuation. This paper has benefitted from suggestions from professors

Cynthia Campbell, Stuart Gillan, Roger Ibbotson, Micah Officer, Jay Ritter and Susan Woodward. The

paper also has benefited from suggestions by James Lurie and three anonymous reviewers for the

 

 

Business Valuation Review

 

 

.

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December 18, 2011

when and how to assess the value of a company and/or its assets

The Going Concern Principle:

when and how to assess the value of a company and/or its assets

Introduction

The going concern concept is one of the cornerstones of the financial accounting world. In essence, the going concern says that a Balance Sheet of a company must reflect the value of that company as if it were to remain in existence for and beyond the foreseeable future. The opposite of the going concern concept, so to speak, is to say that the company will fold within one year from the Balance Sheet date.

We will see in this article that the going concern concept is vital for us to be able to take as much of a rational view of a company as is possible. In this article, we will discuss the following key questions: who makes the going concern assessment and why?; and how do we arrive at the liquidation value of a company and/or its assets?.

Who makes the going concern assessment and why?

There are two major parties in the assessment of a company as a going concern: the company’s management and its auditors. In addition, given that the following factors may lead to a going concern reassessment, the list of who makes a going concern assessment could possibly include a major creditor; a financier/banker. Those factors are:

  • substantial operation losses incurred in the current year
  • continuous availability of trade credit
  • potential litigation
  • possible loss of a major customer
  • potential patent sale and current ratio near the loan agreement limit

(Edwards)

The accountant’s duty to consider and act on the going concern principle

International Accounting Standard 1 (revised 1997), "Presentation of Financial Statements" sets out management's responsibility for assessing going concern as follows:

"When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When management is aware … of material uncertainties … which may cast significant doubt upon the enterprise's ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise is not considered to be a going concern.

In assessing whether the going concern assumption is appropriate, management takes into account all available information for the foreseeable future, which should be at least, but is not limited to, twelve months from the balance sheet date.”

(IAS 1)

IFAC, in their International Standard on Auditing (ISA) exposure draft on the Going Concern principle, laid out a comprehensive view of it. They discuss the role both of the management of the company and its auditors. Firstly, management:

Management’s role

Management's assessment of the going concern assumption involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. The following factors are relevant:

  • the degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future a judgment is being
  • any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events can overturn a judgment which was reasonable at the time it was made.
  • the size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors all affect the judgment regarding the outcome of events or conditions.
  • Material uncertainties related to the types of events or conditions set out in paragraph 9 of this ISA may cast significant doubt upon the going concern assumption.


The auditor’s role

And now the auditor’s responsibility. In general, the IFAC position is conservative: there is no doubt that they allow for the auditor to have a key role in the assessment of a company from a going concern perspective. However, they take the now traditional view that the auditor need not be a bloodhound, searching through every nook and cranny in an attempt to get to the bottom of whether the going concern principle is valid or not. Moreover, the simple fact that the auditor did not say that the company should no longer be considered a going concern, does not mean that it is!

The auditor's responsibility is to consider whether there is material uncertainty related to events or conditions which may cast significant doubt upon the entity's ability to continue as a going concern based on the auditor's knowledge of relevant events or conditions at the time of conducting the audit. The auditor's consideration of the going concern assumption applies irrespective of the accounting framework that has been used in the preparation of the financial statements, even if the going concern assumption is not specifically mentioned within that framework. The auditor cannot predict future events or conditions which may cause an entity to cease to continue as a going concern. Accordingly, the absence of any reference to going concern uncertainty in an auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern. Management's assessment of the entity's ability to continue as a going concern is a key part of the auditor's consideration of the going concern assumption.


The auditor considers the going concern assumption for the same period for which management assumes responsibility, a period which should be at least, but is not limited to, twelve months from the balance sheet date.

Nevertheless, IFAC more positively, in my view, go on to discuss the audit plan. In this discussion, they don’t exactly contradict the extract above in which we take the bloodhound point of view, but they do clearly set out that the auditor does have a duty to take a feedforward view of his role: anticipate that there may be a problem, at least

In developing the audit plan … The auditor considers events and conditions relating to the going concern assumption at the planning stage of the audit, because this consideration allows for more timely discussions with management, review of management's plans and resolution of any identified going concern issues and thus may affect the nature, extent and timing of the auditor's procedures. ... In addition, the auditor remains alert to events or conditions relating to the going concern assumption that come to the auditor's attention throughout the audit since these may further affect the procedures to be performed.

When to question the going concern prospects of a company

Some of the key issues that IFAC sets out as events that the auditor ought to consider in this context are financial, adverse key financial ratios, operating and other. As perhaps we should expect, the events listed by IFAC are comprehensive, even though they say their list is not exhaustive. Let’s look at each of these four categories in turn.

Financial

IFAC discuss the position in which fixed term borrowings are approaching maturity but the company may have no realistic prospects of renewal or repayment. Alternatively, there could be evidence of over trading and an excessive reliance on short term borrowings to finance long-term assets.

The auditor must also look for indications of withdrawal of financial support and negative cash flows as shown either by the historical accounting records and/or by cash budgets or projections.

Adverse key financial ratios

Clearly, anything prescribed under this heading could be dangerous, misleading, or simply not comprehensive enough. That is, depending on the state of the Economy in which the company is operating, the nature of the sector in which the company is operating and so on, the number and variability of ratios could differ from case to case.

Nevertheless, the IFAC view here is a sensible one; and they discuss, inter alia ,

Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.

Arrears or discontinuance of dividends no longer being declared; and the possibility that the latest declared dividends have yet to be paid, well after their due date. A persistent rescheduling of creditors’ payments and maybe the shift from buying on account to buying for cash would ordinarily be cause for concern. The need to reschedule formal loans would also be a cause for raised eyebrows in the context of the going concern principle.

Companies that find that they are unable to secure financing for essential new product development or other essential investments must clearly have pause for thought at least as to the view of others of their long term viability.

Operating

The development of such cost and management accounting approaches as Activity Based Costing and the Balanced Scorecard to the work of organisations should lead us to applaud the inclusion in this discussion of this section: Operating aspects. In that financial and financial management are learning more each day about the impact and importance of the non financial aspects of businesses. IFAC discuss the operating aspects of a business in the following terms:

  • Loss of key management without replacement
  • Loss of a major market, franchise, license, or principal supplier
  • Labor difficulties or shortages of important supplies


Other

Under the heading of Other, IFAC adds a few other aspects that are pointers to the kind of issues that the auditor needs to look out for in the context of the going concern debate. These remaining issues are:

  • Non compliance with capital or other statutory requirements
  • Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that could not be satisfied
  • Changes in legislation or government policy expected to adversely affect the entity

Of course, whilst each of these issues, either singly or collectively, could be considered serious for any company, taken in isolation, we could take a mistaken view of the situation. For example, even though a company might be having to reschedule its creditor and debt repayments; management could be taking steps to reorganise its affairs in such a way that it resolves its financing situation within the forthcoming financial year.

Going Concern Assumption Appropriate but a Material Uncertainty Exists

Finally in this section, we should make the observation that a company may receive a going concern clean bill of health; and yet a material uncertainty exists. That is, we need to consider whether the financial statements of a company adequately describe the principal conditions that give rise to a significant doubt about the entity's ability to continue in operation for the foreseeable future and management's plans to deal with these events or conditions; and state clearly that there is a material uncertainty related to events or conditions which may cast significant doubt about the entity's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

How do we arrive at the liquidation value of a company and/or its assets?

(This section is based on the work of Braun: see reference section at the end for details)

“A valuation is always determined as of a particular point in time, and generally should not be relied upon for other dates."

(Braun)

There are a variety of valuation approaches a business appraiser will consider in the valuation of a … company. Among the most common are the

  • asset approach,
  • market approach, and
  • discounted cash flow approach
  • formula approaches

In actual practice, a combination of approaches is commonly used with differing weights given to each selected approach as appropriate.

The asset approach relies on a company's adjusted book value by substituting the fair market value of assets and liabilities for the stated value of assets and liabilities. This approach is most useful for valuing a company which has significantly undervalued assets. It may also be useful for valuing a company with substantial non-operating assets such as land or natural resources. This approach is generally not used, however, to value a company as a going concern .

The market approach is simple for the quoted company: just take the stock market value of the company at the relevant date and multiply it by the number of shares in issue. However, what about the private company that is not quoted on any stock exchange, and whose shares are thus very difficult to value. The solution here requires trying to find one or more public companies that are as similar as possible to the private company being valued. To use this approach, we must compare the private company to the public companies in terms of size, growth, gearing and so on to determine relative risk.

The discounted cash flow approach relies on multiple year projections based on management's reasonable estimates of the company's prospects. The reasonableness of projections should be considered by comparison to the company's historical results and the outlook for the company and the industry.

Projected cash flow is determined by depreciation to earnings to depreciation and subtracting capital expenditures plus or minus changes in working capital. A terminal value at the end of the projection period is then calculated. The appropriate discount rate may be the company’s own hurdle rate or it based on the company's weighted average cost of capital . A risk premium may be added to the discount rate as appropriate under the circumstances to determine a risk-adjusted discount rate: despite the very sophisticated methods of deriving discount rates, it is still common for management to add a fudge factor to cover for risk.

The formula approach, or rules of thumb, may be considered if appropriate. A formula may take many forms, such as a multiple of book value or a multiple of revenues. The advantage of using a formula approach is that it is simple and inexpensive to use. However, the disadvantage is that it may not reflect fair market value. Furthermore, a formula may not be dynamic enough to reflect changing market conditions in which a company is operating.

Any of these approaches will need to be further adjusted to account for qualitative factors and special circumstances such as non-recurring gains and losses,

reasonable management compensation, key person risk, "excess" cash, and non-operating assets.

The Deloitte & Touche approach to valuing the business

Determining the value of a business is one of the most difficult aspects of any transaction, since every business is unique.

A common misconception is that valuation is an exact science. While the use of formulas in a valuation implies exactness, it is very difficult to set the worth of a company at a single figure. To establish a fair market value,

hard figures, such as assets, liabilities, and historical earnings and cash flow are used.

soft , or subjective, figures, such as projected earnings, future cash flow, and the value of intangibles (e.g., patents, know-how, the quality of management, and leases at below-market rates) are also used. Soft figures also include such considerations as current market conditions, industry popularity, and, most important, the objectives of the seller or buyer.

With all this subjectivity, fair market value can be, at best, only a range of estimates.

The final selling price can be either higher or lower than the estimated range of values for the company, depending on the

  • eagerness of the buyer to buy and the seller to sell,
  • demand for the type of company,
  • form of consideration paid,
  • negotiating skills of the parties

and so on

In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value. Moreover, ask appraisers the value of your business and they will respond, "What's the purpose of the valuation?": to sell it as a going concern, to sell it on a liquidation basis, to sell it on a break up basis. Different techniques can be used to arrive at different values, and each of the values may be correct for a specific situation. For purposes of this discussion, we are assuming that we are valuing a business based on the valuation techniques used for buying or selling a company as a going concern.

Whichever technique is used, the valuation comprises these key elements:

  • gathering information about the company and the industry;
  • recasting the historical financial statements;
  • preparing prospective financial statements;
  • comparing the company's results with those of other companies in the industry; and,
  • applying appropriate valuation methodologies.

We have already seen some of what Deloitte and Touche have to say about valuing a business above; but their section on recasting, or adjusting, financial statements is new and interesting; and some of their ideas follow. We should bear in mind, however, that if we tried to apply these ideas in anything other than a considered and serious manner, we would have severe difficulties.

Adjustments to the Income Statement can include:

  • Excessive salaries: paid to individuals who can be replaced at much lower salaries
  • Excessive perquisites, such as company cars and club memberships
  • Favorable or unfavorable leases
  • Interest rates if the buyer borrows at significantly different rates
  • Nonrecurring expenses, such as legal expenditures, relocation costs
  • Accelerated depreciation charges, used to reduce taxable income
  • "Window dressing," or practices that temporarily improve current earnings. For instance, a company might reduce necessary long-term investments, such as research, advertising, or maintenance, improving its current earnings but weakening its potential for future earnings
  • Tax rates. If the company has an unusual tax situation, eg, available net operating loss (NOL) carryforwards, an adjustment should be made to reflect "normal" taxation

Some typical Balance Sheet adjustments may include the following:

  • Undervalued or overvalued marketable securities
  • Fixed assets that have appreciated in value.
  • Intangible assets that may not be recorded on the books.
  • Unrecorded pension and other postretirement liabilities.
  • Contingent liabilities.

After identifying and quantifying applicable adjustments, you will have a more meaningful set of financial statements to use to make financial projections and to compare the company's performance with that of other companies.

Conclusion

The going concern principle is among the most important accounting, and therefore business, principles. Nevertheless, despite the definition of the principle being relatively straightforward, the application of it can be fraught with difficulties. At one extreme, we have many examples of companies that were given a clean going concern bill of health at the end of one financial year only to find itself in liquidation within 12 months of the end of that financial year. At the other extreme, we have the significant difficulties in trying to arrive at a fair value for a company that seems properly assessed as a failing company.

This article has discussed the role of management, auditors and others in the going concern assessment of a company and we have explored several of the issues facing someone who is trying to place a value on a business: for either going concern or non going concern purposes.

References

The International Federation Of Accountants

International Standard on Auditing

Exposure Draft: Going Concern (1997)

From: //www.ifac.org/StandardsAndGuidance/ExposureDrafts/IAPC/GoingConcern/Body.html#8

International Accounting Standard 1 (revised 1997) Presentation of Financial Statements

International Accounting Standards Committee

Edwards, Donald E.

Going-concern evaluation: factors affecting decisions

From: http://www.fortunecity.com/banners/interstitial.html?http://www.nysscpa.org/cpajournal/old/14522928.htm

Richard S. Braun (1998)

Valuing A Private Company: An Introduction to Business Valuation

Willamette Capital Willamette Management Associates

From: http://www.fortunecity.com/banners/interstitial.html?http://www.fed.org/leading_companies/jan98/tips.html

Deloitte & Touche LLP

VALUING THE BUSINESS

From: http://www.fortunecity.com/banners/interstitial.html?http://www.dtonline.com/selling/valuingbusiness.htm

© Duncan Williamson

Revised July 2001
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December 16, 2011

Fair Value Measures Including Mark to Market

Fair Value Measures Including Mark to Market
Presenter(s): The Appraisal Foundation
Duration: 1 Hour 26 Minutes 49 Seconds
Questions? Please click the paperclip icon above and direct your question to Paula Douglas Seidel (paula@appraisalfoundation.org)
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December 02, 2011

When a court counts a professional’s income as an asset …

When a court counts a professional’s income as an asset …

After more than 20 years of marriage, a lawyer and his wife divorced. The wife hired a CPA expert, who testified that the husband’s practice had no real assets but a bank account with nearly $120,000—and that was the value of the enterprise, he said. The court found that the husband earned approximately $270,000 per year and the value of his law practice was $65,000, and awarded each party half. The husband appealed, saying the court erred by considering the goodwill value of his practice.

The appellate court disagreed, finding that the trial court did not consider goodwill or the husband’s future income in its valuation of the law practice. However, it did not properly characterize the cash account, which did not “change from income to asset” merely because it had not been distributed by the time of trial. The husband’s income, “past and projected into the future, should be (and was) considered in addressing . . . spousal support,” the court held, in finding that the law practice had no appreciable value. Read the complete digest of In re the Marriage of Jackson, 3925703 (Iowa App.)(Sept. 8, 2011) in the December Business Valuation Update; the court’s unpublished opinion will be posted soon at BVLaw.

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November 19, 2011

Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581).

http://www.boe.ca.gov/proptaxes/pdf/ah58112.pdf

ASSESSORS' HANDBOOK SECTION 581,

EQUIPMENT AND FIXTURES INDEX, PERCENT GOOD AND VALUATION FACTORS

the 2012 revision of Assessors' Handbook Section 581

, Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581), was approved by the Board on November xx, 2011. The 2012 revision of AH 581 is available on the Board’s website at www.boe.ca.gov/proptaxes/prioryrs.htm. This annual revision includes updates to the equipment index and percent good factors tables. Also included are valuation factors for:

• Non-production computers (adopted by the Board in April 2009);

• Semiconductor manufacturing equipment and fixtures (adopted by the Board in October 2008);

• Biopharmaceutical industry equipment and fixtures (adopted by the Board in July 2008);

• Document processors (adopted by the Board in December 2009); and

• Offset printing presses (adopted by the Board in December 2009).

The nonproduction computers, semiconductor manufacturing equipment, and biopharmaceutical equipment valuation factor tables are a result of valuation studies conducted pursuant to Revenue and Taxation Code section 401.20. This revision also includes guidance to industry in identifying, gathering, and verifying data to submit to Board staff for the purpose of conducting a valuation study of their personal property/equipment.

All information is for use as of the 2012 lien date, January 1, 2012. The 2012 revision of AH 581 will only be available on the Board's website; no hard copies will be distributed. If you have questions regarding this publication, you may contact Mr. Isaac Cruz at 916-274-3355 or at Isaac.Cruz@boe.ca.gov.

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Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581).

http://www.boe.ca.gov/proptaxes/pdf/ah58112.pdf

ASSESSORS' HANDBOOK SECTION 581,

EQUIPMENT AND FIXTURES INDEX, PERCENT GOOD AND VALUATION FACTORS

the 2012 revision of Assessors' Handbook Section 581

, Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581), was approved by the Board on November xx, 2011. The 2012 revision of AH 581 is available on the Board’s website at www.boe.ca.gov/proptaxes/prioryrs.htm. This annual revision includes updates to the equipment index and percent good factors tables. Also included are valuation factors for:

• Non-production computers (adopted by the Board in April 2009);

• Semiconductor manufacturing equipment and fixtures (adopted by the Board in October 2008);

• Biopharmaceutical industry equipment and fixtures (adopted by the Board in July 2008);

• Document processors (adopted by the Board in December 2009); and

• Offset printing presses (adopted by the Board in December 2009).

The nonproduction computers, semiconductor manufacturing equipment, and biopharmaceutical equipment valuation factor tables are a result of valuation studies conducted pursuant to Revenue and Taxation Code section 401.20. This revision also includes guidance to industry in identifying, gathering, and verifying data to submit to Board staff for the purpose of conducting a valuation study of their personal property/equipment.

All information is for use as of the 2012 lien date, January 1, 2012. The 2012 revision of AH 581 will only be available on the Board's website; no hard copies will be distributed. If you have questions regarding this publication, you may contact Mr. Isaac Cruz at 916-274-3355 or at Isaac.Cruz@boe.ca.gov.

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Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581).

http://www.boe.ca.gov/proptaxes/pdf/ah58112.pdf

ASSESSORS' HANDBOOK SECTION 581,

EQUIPMENT AND FIXTURES INDEX, PERCENT GOOD AND VALUATION FACTORS

the 2012 revision of Assessors' Handbook Section 581

, Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581), was approved by the Board on November xx, 2011. The 2012 revision of AH 581 is available on the Board’s website at www.boe.ca.gov/proptaxes/prioryrs.htm. This annual revision includes updates to the equipment index and percent good factors tables. Also included are valuation factors for:

• Non-production computers (adopted by the Board in April 2009);

• Semiconductor manufacturing equipment and fixtures (adopted by the Board in October 2008);

• Biopharmaceutical industry equipment and fixtures (adopted by the Board in July 2008);

• Document processors (adopted by the Board in December 2009); and

• Offset printing presses (adopted by the Board in December 2009).

The nonproduction computers, semiconductor manufacturing equipment, and biopharmaceutical equipment valuation factor tables are a result of valuation studies conducted pursuant to Revenue and Taxation Code section 401.20. This revision also includes guidance to industry in identifying, gathering, and verifying data to submit to Board staff for the purpose of conducting a valuation study of their personal property/equipment.

All information is for use as of the 2012 lien date, January 1, 2012. The 2012 revision of AH 581 will only be available on the Board's website; no hard copies will be distributed. If you have questions regarding this publication, you may contact Mr. Isaac Cruz at 916-274-3355 or at Isaac.Cruz@boe.ca.gov.

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Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581).

http://www.boe.ca.gov/proptaxes/pdf/ah58112.pdf

ASSESSORS' HANDBOOK SECTION 581,

EQUIPMENT AND FIXTURES INDEX, PERCENT GOOD AND VALUATION FACTORS

the 2012 revision of Assessors' Handbook Section 581

, Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581), was approved by the Board on November xx, 2011. The 2012 revision of AH 581 is available on the Board’s website at www.boe.ca.gov/proptaxes/prioryrs.htm. This annual revision includes updates to the equipment index and percent good factors tables. Also included are valuation factors for:

• Non-production computers (adopted by the Board in April 2009);

• Semiconductor manufacturing equipment and fixtures (adopted by the Board in October 2008);

• Biopharmaceutical industry equipment and fixtures (adopted by the Board in July 2008);

• Document processors (adopted by the Board in December 2009); and

• Offset printing presses (adopted by the Board in December 2009).

The nonproduction computers, semiconductor manufacturing equipment, and biopharmaceutical equipment valuation factor tables are a result of valuation studies conducted pursuant to Revenue and Taxation Code section 401.20. This revision also includes guidance to industry in identifying, gathering, and verifying data to submit to Board staff for the purpose of conducting a valuation study of their personal property/equipment.

All information is for use as of the 2012 lien date, January 1, 2012. The 2012 revision of AH 581 will only be available on the Board's website; no hard copies will be distributed. If you have questions regarding this publication, you may contact Mr. Isaac Cruz at 916-274-3355 or at Isaac.Cruz@boe.ca.gov.

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November 08, 2011

BVWire News

BVWire News

 

Do appraisers need to specialize now?

Posted: 07 Nov 2011 06:14 PM PST

Mark Edwards says that his peers at Grant Thornton use the term “chose a major” when mentoring new staff.  ”We want people to find an area they’re passionate about, learn it, and become the best in the business at it.”  Linda Trugman agrees that younger professionals will do better to pick an area, whether industry specialization, or tax, or litigation.  With the help of mentors, this can create valuation practices that produce future leaders and where, as Jay Fishman adds, “the partners have each others’ backs.”  Fishman concluded:  ”business valuation has been very very good to us, and we owe it to give back.”


Is your valuation work biased?

Posted: 07 Nov 2011 06:03 PM PST

Here’s a way to see if your valuation is not objective, recommended by Jim Hitchner at the wrap-up session at the AICPA BV Conference:

“List all of the assumptions you’ve made to come to your conclusion of value.   You know what they are.   Then, evaluate whether each assumption leads to a higher value or a lower value.  If they all lean in the same direction, your valuation is probably biased.”

In a profession that prides itself on objectivity, this kind of review makes a lot of sense.   As one appraiser recently told BVWire last week, “I’d really like to know that every appraisal I complete would have the same number at the bottom whether I was doing the work for the party that benefits from a high value or the party that benefits from a low value.  That’s the standard I try to hold myself to in this business.   Do I achieve that standard?  Well…”


How do you value “synergy” in an impairment test?

Posted: 07 Nov 2011 05:42 PM PST

“We actually try to figure out the cashflows from the competitive advantage,” said Mark Edwards (GT), speaking at the Hardball with Hitchner wrapup session at the AICPA National BV Conference this afternoon.  But others try to deal with it by looking at the BVR/Mergerstat Control Premium Study and applying a control premium.  ”I don’t particularly like the control premium approach here, though,” added Jim Alerding.

“The question that needs to be justified to auditors is why some one should pay 20% more,” said Edwards.  ”So just looking at control premium data may not be sufficient justification.   You’d like to see the benefits in the cashflow of the assumed control value.”


Quote from the latest AICPA BV Hall of Fame member…

Posted: 07 Nov 2011 05:26 PM PST

Robert Reilly (Willamette) was in the men’s room when the announcement was made that he had received this year’s AICPA Business Valuation Hall of Fame Award.   He said he was honored, and told BVWire that he wished his mother-in-law could have been in Las Vegas to hear this news.  ”She still doesn’t understand what I do, and often says to my wife ‘you could have married the doctor, but instead your married the CPA’.”

Ah well…congratulations to Robert…and we understand what you’ve done!


 

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November 02, 2011

BVWire Issue #110-1: Expert Reports Still Discoverable in Tax Court

Reminder: Expert reports still discoverable in Tax Court

The long-awaited amendments to Rule 26 of the Federal Rules of Civil Procedure, made effective at the beginning of this year, have largely been “great,” according to attorney Edward M. Robbins (Hochman Salkin Rettig Toscher & Perez, P.C.), who presented in last week’s “Lawyers Roundtable,” part 2 of BVR’s 2011 Tax Summit, moderated by Jay Fishman (Financial Research Associates). Prior to the amendments, which specifically exempt draft expert reports from discovery in federal court proceedings, “you wasted a lot of time trying to ‘get behind’ the reports—and frankly, by the end of the day, it wasn’t worth your time,” Robbins conceded. “But you did it anyway because everybody did.” Under the amended rule, an expert’s compensation is still discoverable, along with any facts or assumptions the attorney may have provided the expert to form his or her opinion. But the bottom line: In federal court, “‘collaboration’ is no longer a bad word,” Robbins said, and attorneys and experts no longer have to “walk on eggshells” every time they communicate.

But not in Tax Court: Roughly 80% of the tax valuations that appraisers perform are related to federal tax cases, Stephanie Loomis-Price (Winstead PC) reminded listeners—and the U.S. Tax Court has not yet adopted an analogous rule to the amended Rule 26. As a result, “we still struggle with what we can say to our experts, what we can get from them, whether we can edit or even comment on their drafts,” Loomis-Price said. When an attorney writes on a draft report, the comments are protected under the work product privilege—but as soon as the expert receives the draft, the protection disappears. This means that tax experts should still “assume everything you do, say, or write will be discoverable to the other side,” Robbins said. Hopefully, the Tax Court will “see the light,” he added, and Loomis-Price agreed: Members of the tax bar as well as appraisal associations “ought to be pestering the Tax Court,” she said, to amend its rules.

Are you having issues with professional liability insurance for your BV firm?   Let us know.

We've been hearing rumors of disappearing coverage, changing premiums, coverage exclusions, and new policy requirements demanded by providers of errors & omissions (E&O) insurance for business appraisers. Is this true? Are you among those affected? Let us know your experiences here (and you can get the results for free by leaving your email at the end, if you wish).

Thanks from your colleagues—and from BVR.  We'll publish our findings in BVWire next week.

Will I-bankers ever understand what BV appraisers do?

Last week’s report from an investment banker on providing the “market value” of an ambulatory surgery center (ASC) prompted Gary Trugman (Trugman Valuation Associates) to point out that the I-banker’s comments were “not only self-serving, but it shows his ignorance about business valuation. A business appraiser interprets the market and does not make the market,” Trugman says. “A proper business valuation will use the information from sales of similar properties to assist in the valuation project.” Take the I-banker’s encouragement to let buyers determine an ASC’s value, rather than valuation experts. “This only proves that the writer does not understand what we do,” Trugman says. “It is time for the investment bankers to follow some set of standards and learn about business valuation rather than do the slipshod work that is being seen in the market. Maybe they would be sued less often!”

In the healthcare field, the I-banker’s remarks may be “misleading and potentially dangerous,” says Jason Ruchaber (HealthCare Appraisers, Inc.). “In many instances the sale of a surgery center (or interest therein) is subject to healthcare regulations that preclude the buyer from paying anything other than FMV,” which “has a very specific definition in the healthcare industry,” more nuanced and perhaps more restrictive than the standard FMV definition used in other fields. “Deviating from the ‘hypothetical world’ of FMV to the real world of investment bankers may also lead buyers and sellers of these interests to face the real world possibility of fines, loss of their Medicare license and/or jail time,” Ruchaber warns.

 “For example, if a hospital buys an ASC, it will need to demonstrate that they are not paying above FMV; otherwise this could be construed as a kick-back to fill beds by referrals through the ASC,” adds Kevin Jackson (PwC Transaction Services) in a separate comment. And, taking a step back from healthcare, “Aren’t we potentially mixing standards of value—i.e., fair market value vs. investment or strategic value?” asks Michael Prost (Mueller Prost PC).

Another example: When pricing a business for sale, “Why would you ever use a BV expert . . . when using ‘fair market value,’ as the standard of value excludes strategic or synergistic value?” asks David Bishop, an attorney/CPA with Bishop Dulaney & Joyner, who also provides BV services through Bishop & Co. “I never have figured out how you could have a ‘willing seller’ at a price lower than what the best buyer (perhaps a strategic buyer) will pay unless the seller is not ‘reasonably informed of the relevant facts,’” he adds. “I suppose the BV expert could use a different standard of value but I rarely see that.” Not to criticize BV experts or brokers, Bishop adds: “There are plenty of good professionals—too bad we don’t always work together.”

Key takeaways from Turner and recent
FLP cases

As we recently reported, the taxpayer in Estate of Turner failed to persuade the Tax Court to preserve the discounted value of a family limited partnership (FLP), due largely to the passive character of the transferred assets (marketable securities) and the partnership’s lack of any legitimate, non-tax business purpose, including any overriding investment philosophy.

The takeaways from Turner: If asset consolidation and centralized management are among the stated, non-tax purposes for the FLP, then “don’t hold passive assets; don’t have the same management [before as after formation]; and don’t have the same investment philosophy,” said Stacey Delich-Gould (Cahill Gordon & Reindel LLP), who spoke at the recent 2011 Fall Meeting of the ABA Section of Taxation and Section of Real Property and Trust & Estate Law in Denver. “Do have arms-length bargaining” among the designated general and limited partnership interests, she added. The bottom line: “The [FLP] cases in which the estate has been successful in Tax Court have all come under the protection of the bona fide sale exception,” Delich-Gould said. “Therefore, a real, significant non-tax purpose for the partnership is an essential element of any successful plan.”

For the first time: Valuation Advisors adds foreign transactions

Exciting news from the Valuation Advisors Lack of Marketability Discount Study: We’ve just added 867 new deals to the database, including—for the first time—757 international transactions from 26 countries, with a median revenue of $42 million. China tops the list of new foreign transactions, making the current breakdown by countries (top 10):

Country

Count

United States

7,624

China

426

Israel

103

United Kingdom

41

Korea

22

Canada

21

Netherlands

17

France

14

Taiwan

14

Argentina

12

Hong Kong

11

Digging deeper into the data, “although we haven’t statistically analyzed the relationship between U.S. and international DLOMs,” says Brian Pearson, president of Valuation Advisors, the general trend appears to parallel results from the domestic data; that is, “the international discounts tend to increase over time from the IPO date,” he says. Predictably, analysts will want to use the international data when valuing international companies or a company that has a considerable portion of its sales, earnings, or operations overseas, using new tools that permit searches by aggregate or individual country, in addition to the existing search parameters for U.S. companies.

At the same time, “If you are trying to calculate discounts by industry or for a particular time period only, you may want to use all the companies (foreign and domestic) in the database,” Pearson suggests, noting that with over 9,000 transactions—2,487 added this year alone—Valuation Advisors is currently the “largest valuation discount database in the world.”

Preview of new data from Pepperdine Private Capital Markets survey

New from the Pepperdine Private Capital Markets Project Fall '11 Survey: During the past year, the bank loan success rate was 44% for businesses with less than $5 million in revenues; 72% for businesses with $5 to $25 million in revenues; and 90% for businesses with greater than $25 million in revenues.

That’s just one data point, provided by John K. Paglia, associate professor of finance at Pepperdine University, who will present more from the survey at next week’s AICPA National BV Conference in Las Vegas. BVWire will be there, covering multiple sessions, news, and updates. Stay tuned . . .

Must an LLC turn over the valuation records of its subsidiary?

The Delaware Chancery Court just provided a good checklist of documents to request and require in a “books and record” action by the controlling member of a limited liability company (LLC), particularly when the purpose of the request is to ascertain the value of the member’s holdings, not just in the LLC but in its subsidiary. In this case, the LLC held the assets of a company that owned and operated eight wine brands. When the subsidiary started to founder, the LLC’s limited partners petitioned the Delaware Chancery to access the books and records of the LLC as well as the subsidiary. The LLC objected under Delaware law, maintaining that since the subsidiary was near insolvency, the valuation was zero (or a simple matter of mathematics), the request was “meaningless.” The LLC also said the relevant operating agreements gave members no separate contractual right of access to the sub’s records.

The court disagreed on both points. The operating agreements gave members inspection rights equal to those provided by Delaware law. And under the case law, since the defendant had no separate value from the subsidiary, it would be “unfair” to require the member to attempt to value its holdings without providing access to the records of the LLC’s only asset—in particular, those records pertaining to value, the court held. It then approved most of the petitioner’s 16-item request for books and records, excepting only those that did not relate directly to value (e.g., the subsidiary’s ability to pay its creditors) and permitting redaction for trade secrets. Read the complete digest of DGF Wine. Co., LLC v. Eight Estates Wine Holdings, LLC, C.A. No. 6110-VCN (Del. Ch.)(Aug. 31, 2011), in the November Business Valuation Update; the court’s opinion is posted at BVLaw.

Filings for 2010, 2011 decedents: new insights on IRS requirements, including determining FMV of undivided interests

Last August, the Internal Revenue Service released Notice 2011-66 , concerning the methods for electing and applying a carryover basis treatment under Sec. 1022 of the Internal Revenue Code (IRC) to 2010 estates, and Rev. Proc. 2011-41 , providing optional safe harbor guidance under Sec. 1022 IRC. In a detailed, thorough analysis, Steve Akers (Bessemer Trust) summarizes what’s new and important in the IRS guidance, and highlights the provisions relevant to fair market value appraisals. In particular, Akers observes that under the “Aggregation Rule” in Section 4.04 of Rev. Proc. 2011-41:

The “Basis Increase” allocated to any asset cannot result in the basis of that asset exceeding the fair market value of the asset on the date of death. If Basis Increase is allocated to an “undivided portion” of an asset that is distributed to a particular recipient, the IRS takes the taxpayer-favorable position that discounts do not have to be applied in determining the fair market value limit of each recipient’s “undivided portion.” Instead, “the FMV of an undivided portion of the decedent’s property that is acquired from the decedent at death is a fractional share of the FMV of the decedent’s property at death.”

“That rule would apply explicitly to undivided interests in real property,” Akers observes. “Presumably, it will also apply to minority interests in partnerships, LLCs, and corporations that are distributed among the estate beneficiaries.” Read Akers’ complete overview, written for Leimberg Information Services and presented to the National Association of Estate Planners Council, here.

Appraisers know the importance of a single letter—and of continuing education

There’s a world of difference between the IRS and IFRS. A CVA is not a CBA, just as a DLOM is never a DLOC. So when we ran a headline last week on options for “CLE” instead of “CPE”—we misplaced an important letter in the acronym for continuing education for appraisers, standing for: “Professional.” Our apologies—and here’s our current overview of Continuing Professional Education for business appraisers, to complete your year-end requirements as well as your penchant for getting all the facts, information, and important details in any valuations:

  • Judges Roundtable: View From the Bench, Part III of BVR’s Tax Summit, with Hon. David Laro, Hon. Julian Jacobs, Hon. Mary Ann Cohen (all U.S. Tax Court), moderated by Jay Fishman and hosted by Georgetown Univ. Law Center, on Friday Nov. 4.
  • Valuing a Majority Fractional Interest concludes the Tax Summit and features Neil Mills-Mazer (Internal Revenue Service), who will introduce his controversial “minority premium” model of fractional interest valuations, on Friday Nov. 11.

ASA will move forward with healthcare, strategic initiatives

In its meeting prior to last month’s national conference in Chicago, the ASA’s Business Valuation Committee approved a proposal representatives from the business valuation, machinery and technical services, and real property sections to design and teach a “multi-discipline course in valuing health care entities,” reports Linda Trugman, chair of the BV Committee, in her monthly e-update to members. “The committee will also be making a recommendation to the Board of Governors to go forward with this initiative,” Trugman adds. “I know that many of you are interested in health care valuation and we are looking forward to meeting those needs.” Another major item on the agenda: the design and implementation of a strategic plan, which the committee will continue to work on over the next few months.

FASB to try new outreach program with next release

In his remarks to the National Association of State Boards of Accountancy last week, FASB chairman Leslie Seidman announced a “new technique” to solicit feedback from the financial community regarding its standards convergence project with the IASB. Starting with the joint release of a revised exposure draft on revenue recognition in the next few weeks, the boards will hold workshops with representatives from certain key sectors, asking companies to prepare “before and after” examples of their common transactions under current GAAP and the proposed standard. “This will reveal whether companies understand the requirements and help identify any unintended consequences,” Seidman said. “We then plan to use these materials to discuss the results with users of financial statements to help them understand the nature of any changes that may result. We have other forms of field work planned,” he added, “which we view as an essential element of our due process to evaluate the costs and benefits of new standards. We welcome your input and involvement in the process.” In addition to addressing the status of the international convergence project, Seidman also discussed his views on the SEC’s proposal to incorporate IFRS and “where we stand on the issue of standard-setting for private companies.” Read his complete remarks here. 

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October 05, 2011

BV Wire

 BV Wire

Best resources for valuing oil & gas assets

When appraising oil and gas refineries, look for these primary valuation drivers: revenue, plant capacity, utilization percentage, gross refining per barrel, operating costs, depreciation and amortization, capital expenditures (and cost of capital), and the discount rate, say Siby V. Abraham and Jeffrey W. Kennedy. The two speakers, from Deloitte Financial Advisory Services, were presenters at the first annual Energy Valuation Seminar, hosted last week by the Houston ASA and chapter president Tim Stuhlreyer of Convergent Capital Appraisals.

“There’s a lot of work for all of us in the coming couple of years,” Kennedy added, particularly given industry and economic factors such as consolidation, a shift to independents, regulatory oversight, and liability risks. Further, for valuations within the oilfield services industry (and in light of recent industry events), analysts might consider an upside risk premium adjustment to cover any potential liability risk. But they should also ask themselves: has the market already adjusted for the risk?

For a complete reference library, check out these “best practices” resources for valuing oil and gas reserves, suggested by presenter Allen C. Barron (Ralph E. Davis Associates) and supplemented by our own research:

  • “Which Fair-Market-Value Method Should You Use?” by Forrest A. Garb, Journal of Petroleum Technology (Jan. 1990); available for purchase from OnePetro. (But see Discussion of ‘Which Fair Market Value Method Should You Use?’ at RefDoc.fr.)
  • Series of Recommended Evaluation Practices by the Society of Petroleum Engineers (SPEE)(2002), featuring Inclusion of Hedging Positions in Reserve Reports, Discounting Cash Flows, Reporting Multiple Rates of Return, and Calculating Internal Rates of Return. See also: “Perspectives on the Fair Market Value of Oil and Gas Interests,” Monograph 2 (2002), and “Guidelines for the Practical Evaluation of Undeveloped Reserves in Resource Plays,” Monograph 3 (2011), both available for purchase at SPEE.

IRS DLOM Job Aid ‘brings nothing new,’ say BV appraisers

As expected, nearly two-thirds (65.1%) of respondents to last week’s online survey say that they have read the IRS DLOM Job Aid, and more than a quarter (27.1%) will in the near future. Only 7% of respondents won’t read the Job Aid or say it’s not relevant to their practice.

What may be more surprising: just over half (53.3%) of respondents who’ve read the Job Aid believe that it adds “nothing new to the discussion” of determining marketability discounts. Of the remaining half, nearly three-quarters (72.7%) believe that the Aid’s most important contribution is its broad overview of DLOM methods, while more than a third (36.4%) focus on its implicit assumption that analysts will have to defend every percentage point of a DLOM above zero.

The Job Aid “shows what [IRS] opinion is and what we have to fight against,” commented one respondent. However, the vast majority (83%) say they don’t expect the Job Aid to impact their current practices other than perhaps changing the emphasis and explanation in reports. Several appraisers are waiting to see how the profession as a whole responds. Other survey insights:

  • “It brings nothing new to the table and will change nothing.”
  • “It will cause more disputes.”
  • “The IRS has not been able to convincingly prove . . . that the restricted stock study method is deficient in any way.”
  • “I will only use it when faced with an IRS challenge on discounts, as an insight into their thinking and ‘logic.’ Other than that, I don’t believe much of anything the IRS produces is valuable. Does anybody?”

To find out just how the profession is vetting this document and absorbing it into current tax practices, tune in to BVR’s special 100-minute webinar, FMV Responds to the IRS DLOM Job Aid, featuring Lance Hall (FMV Opinions) on October 12, 2011.

Tax-affecting models: are they relevant
beyond BV?

“The liquidity discussion in the BV community is not dissimilar to the one that we have about the effects of taxes on value,” says Nancy Fannon (Fannon Valuation Group), responding to continuing discussions in the BVWire as well as the greater BV professional community.

“Valuation models in place today effectively treat pass-through entity owners as if they were the only investors ‘smart enough’ to benefit from tax savings,” Fannon says. “However, an abundance of academic research (not to mention common sense and the practical advice that CPAs routinely offer their clients) demonstrates that all investors engage in strategies to reduce or avoid taxes. Our current pass-through entity models fail to consider that the benchmark from which analysts adjust value already has a healthy measure of tax-avoidance baked into it,” she says (emphasis added).

Moreover, “investor taxes do not correlate directly with value,” Fannon adds. “Far from it.” As in the case of determining liquidity discounts, “it seems that only the BV community—and those to whom we have perpetuated this view, including the courts and the IRS—ascribes to this notion.” Similar to the liquidity debate, “advances in academic research seem to make little difference to the models that gain favor, persist in our industry, and seem to be perpetuated on every conference agenda,” observes Fannon, who has been speaking and writing on the topic of taxes and value for the past few years. She is currently completing an article with Keith Sellers (Univ. of Denver), with whom she’ll be conducting an AICPA webinar in early 2012; for more information, visit Fannon’s website. For an immediate overview, consider, “Pass-Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate,” a recent BVR webinar featuring Fannon and Sellers (May 2011).

DOL agrees to re-propose its rule on
ERISA fiduciary

The U.S. Department of Labor's Employee Benefits Security Administration will re-propose its rule on the definition of a fiduciary, says a new DOL release. “The decision to re-propose is in part a response to requests from the public, including members of Congress, that the agency allow an opportunity for more input on the rule,” says the DOL.

The decision also means that the DOL will receive additional input, review, and consideration from stakeholders such as small business owners and their advisors—including valuation analysts and ESOP appraisers. “Specifically, the agency anticipates revising provisions of the rule including, but not restricted to, clarifying that fiduciary advice is limited to individualized advice directed to specific parties, responding to concerns about the application of the regulation to routine appraisals and clarifying the limits of the rule's application to arm's length commercial transactions, such as swap transactions,” says the DOL. Also anticipated are exemptions related to current fee practices of advisers, such as those that have long permitted brokers to receive commissions in connection with mutual funds, stocks, and insurance products. “The agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.”

BVR exclusive: IRS will present its fractional interest model

Ever since the BVWire reported the IRS’s new model on fractional real property interests (which was a show-stopper at the most recent ASA IRS Symposium in L.A.), analysts have debated and disputed its premise, i.e., that any fractional interest above 30% would be difficult to defend against an implied minority premium. At long last—and in an exclusive presentation—the developer of the IRS model will cap off BVR’s four-part Online Tax Summit:

  • Judges Roundtable: View From the Bench, Friday, November 4, featuring Hon. David Laro, Hon. Joseph Robert Goeke, Hon. Julian I. Jacobs, all from the U.S. Tax Court, and moderator Jay Fishman;

Register for all programs in the series (at a discount), or attend each separately.

Non-compete conveys personal goodwill to professional corporation, 9th Circuit confirms

When a dentist incorporated his solo practice back in 1980, he also signed a non-compete, effectively agreeing not to compete against his own corporation (of which he was sole shareholder, officer, and professional employee). More than 30 years later, when he sold the practice to another dentist, he allocated nearly $550,000 of the purchase price to his personal goodwill and then reported the sale on his federal income taxes as long-term capital gain income. After the IRS re-characterized the goodwill as a corporate asset and treated the proceeds as a dividend, the taxpayer sued for a refund in district court, which found for the IRS--and the taxpayer appealed.

Held: the U.S. Court of Appeals for the Ninth Circuit found that under the facts of the case, the dentist effectively transferred his personal goodwill to the corporation through the original non-compete. For federal tax purposes, his professional goodwill became a corporate asset and its sale proceeds constituted a dividend to the taxpayer. Look for the complete digest of Howard v. United States, 2011 WL 3796723 (C.A.9 (Wash.))(Aug. 29, 2011), in a future Business Valuation Update; the 9th Circuit’s opinion will be posted soon at BVLaw, where you can also find the federal district court’s opinion.

For a current, comprehensive guide to valuing dental practices—including sample reports: check out BVR’s Guide to Valuing Dental Practices, edited by Stanley Pollock, who is both a dentist and a business appraiser. The new guide contains two sample appraisals of dental practices and chapters on valuing orthodontic practices as well as professional goodwill.

Values for government contractors still haven’t recovered, says new GT study

Despite the recent rebound in the credit and M&A markets, helped in substantial part by record government spending, “the federal budget deficit is exerting tremendous pressure on government budgets and, hence, government contractors,” says a new Grant Thornton release, The government contractor industry: M&A environment and recent deal trends,” (Sept. 2011):

Over the past 12 months, the government services market has underperformed the broader market. Valuation multiples in the defense and government services market have dropped dramatically since 2005 as defense budgets have flattened out, while the broader markets have actually recovered substantially. The rebound in the public markets has taken place at the same time as budget pressures on government contractors have depressed government contractor valuations.

The new white paper came out of GT’s recent Government Contractors’ Roundtable, which produced several summary reports. Of further interest: look for an analysis of government contractors with a “set aside clarification” by Donald W. Nalley (Beason & Nalley) in the next (November) BVUpdate.

How to avoid the ‘volatility dilemma’ in equity valuations

One victim of the “gut-wrenching” volatility in equity markets has been IPOs, said a recent article in The Wall Street Journal: “With the VIXor ‘fear index,’ hitting extremely high levels of late . . . it is clear investors can’t decide what companies are really worth.”

“So how are poor valuation practitioners supposed to determine the ‘right’ DLOM for a company they are valuing?” asks Ron Seaman (Southland Business Group). “With VIX levels going from the teens to the 40s and back within weeks, what volatility number should they use? Since higher volatility numbers will produce bigger discounts, how can they justify the number? And does the selected number really apply to the subject company or just to the total market?”

One possible solution: Seaman’s study on LEAPS (Long Term Equity Anticipation Securities) avoids the volatility dilemma altogether. “LEAPS put options for the companies (or ETFs) that you choose already contain the market’s volatility estimates for those specific companies, not just for the market as a whole,” Seaman says, who also wrote, “The Effects of Current Economic Troubles on Discounts for Lack of Marketability,” for BVUpdate.

FASB goodwill impairment update may increase cost, complexity for some reporting units

In its just-released Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, the FASB amends ASC 350 to allow entities to “qualitatively assess whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount,” says the Valuation Research Corporation. If it is “more–likely-than-not” that the fair value of the reporting unit is less than its carrying amount, then the entity would proceed with step one of ASC 350’s two-step goodwill impairment test. However, if a review of qualitative factors indicates that the reporting unit will clear the “more-likely-than-not” hurdle and its fair value exceeds its carrying value, then “no further fair value measurement needs be performed,” say VRC analysts.

“FASB has reduced the complexity of the goodwill impairment testing process with this ruling for certain entities that have reporting units with significant differences between fair value and their carrying amounts,” adds P.J. Patel, VRC senior vice president. “However, it is important to note that for entities that have a significant cushion, the ability to qualitatively assess a reporting unit for goodwill impairment prior to commencing a fair value-based test already existed under ASC 350. The qualitative assessment, together with a more-likely-than-not threshold, should reduce the complexity and cost of goodwill impairment testing for these entities that have a significant cushion. But for those entities with [less] cushion, the new standard can result in the qualitative step providing unclear direction, and perhaps more auditor scrutiny.”

Three attempts to comply with entire market value rule—and Lucent’s expert is all but OUT

Remember when the Federal Circuit reversed a record-setting $358 million award in Lucent v. Gateway, because the plaintiff’s damages expert failed to prove that its patented calendar feature furnished a substantial basis for consumer demand of Outlook? Well, on remand to district court, Microsoft (Gateways’ successor) immediately challenged the plaintiff’s new damages expert under Daubert. On the day of the hearing, however, the Federal Circuit issued Uniloc v. Microsoft, which abolished the 25% “rule of thumb” and required plaintiffs “in every case” to apportion damages between the patented/unpatented features of the accused product, and the Lucent court postponed the hearing to permit both sides to re-brief the issue.

When the hearing resumed, Lucent’s expert submitted an “apportionment analysis” that discounted Outlook’s base revenue by the percentage of consumers who used the patented feature, resulting in $73.8 million in damages. This still used the entire market value of Outlook, the court held, and sent the parties back for a third try. This time, Lucent’s expert submitted three different approaches—but the court disallowed all but one, a Georgia-Pacific analysis, which would still be subject to continuing objections under the entire market value rule. Read the complete digest of Lucent Technologies, Inc. v. Microsoft Corp., 2011 WL 2728317 (S.D. Calif.)(July 13, 2011) in the current BVUpdate; the court’s opinion is already posted at BVLaw,  

Keep current on the rule. Since Uniloc, we’ve covered nearly half a dozen new cases that interpret expert damages evidence under the courts’ more stringent application of the entire market value rule. This Thursday, October 6, don’t miss Craig Jacobson (Citrin Cooperman) and Stephen Lieb (Frommer Lawrence & Haug) in “Patent Damages: The Entire Market Value Rule.” This installment of BVR’s Online Symposium on Litigation & Economic Damages will discuss how the increasing dominance of intellectual property as a value-driver has placed a new burden on patent damages in general and entire market value analysis in particular.
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September 20, 2011

Models for Estimating Depreciation in Used Machines and Equipment

New Appraisal Research: 

Models for Estimating Depreciation in Used Machines and Equipment

HOUSTON, Texas (Sept. 20, 2011) In a new research project funded by The Appraisers Research Foundation (TARF), a novel application of the Discounted Cash Flow Method for assessing Percent Good Factors for used machines and equipment has been suggested by Prof. S.A. Smolyak of the Central Economics and Mathematics Institute (CEMI) of the Russian Academy of Science (RAS).
 
The suggested application is grounded in the principle of highest and best use and accounts for such factors as the salvage value of equipment, and associated property and profit taxes without requiring cash flow forecasts of the income obtainable from using the equipment. The latter feature makes it possible to apply the method to intermediate-stage technological equipment, for which the monetary benefits that arise can’t be assessed in an immediate manner.    
 
This research has been prepared under the sponsorship of a grant from TARF and is under the review process for possible publication with The Appraisal Journal. The full report is available on the TARF website:  www.appraiserresearch.org.
 
When applied, Prof. Smolyak’s approach for machinery and equipment valuation offers these solutions:

  1. Eliciting and formalizing general patterns of change in the value of aging equipment
  2. Revealing some inconsistencies in a number of tabular and analytical methods for determining Percent Good Factors
  3. Developing new and practical analytical models which consistently describe the dependency of Percent Good Factors on the age of equipment
  4. Suggesting a method for determining Percent Good Factors for equipment aged beyond its useful economic life
The most pertinent results may be achieved from this method when the equipment depreciation process is treated in a continuous time formulation.
 
Prof. Smolyak received editorial assistance for this research from Dr. Michael Milgrim, for many years the editor of the International Valuation Standards, and from Andrey Artemenkov, MRICS. He also received assistance in developing ideas in this research from Prof. Georgiy Mikerin, from the State University of Management, Department of Economic Measurements, in Moscow, and Igor Artemenkov, FRICS, Russian Society of Appraisers.
 
The Appraisers Research Foundation, a non-profit located in Houston, Texas, funds research projects that will benefit the appraiser community and is actively seeking proposals. For information on the Foundation, go to http://www.appraiserresearch.org and click on Research Results. For information on applying for a research grant, click on the Grants tab.
 
For more information on this research, contact the author of this study at: smolyak1@yandex.ru 
 
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September 12, 2011

ESTATE TAX UNDERPAYMENT PENALTY WAIVED IN GIUSTINA CASE

ESTATE TAX UNDERPAYMENT PENALTY WAIVED IN GIUSTINA CASE

Introduction

Estate of Giustina v. Commissioner, T. C. Memo. 2011-141 (June 22, 2011), is a US Tax Court case involving the value, for estate tax purposes, of a 41.128 % limited partner interest in Giustina Land & Timber Co. LP ("GLT") owned by Natale Guistina at his death on August 13, 2005.  GLT owned and operated 48,000 acres of timberland in the area of Eugene, Oregon.

The estate valued the holding at $12,995,000 for estate tax purposes.  The IRS contended that the value was $33,515,000.  The IRS issued a notice of deficiency determining a $12,657,506 deficiency in estate tax and a $2,531,501 accuracy-related penalty under section 6662 of the Internal Revenue Code.

Taxpayer's Approach to Value

Both the taxpayer and the IRS employed experts to determine the value of the GLT holding. The estate's expert employed four methods, two that were based on the expected cash flow of GLT as an operating entity, one method based on the asset value of the timber holdings, and one method based on the price of shares of publicly-traded timber companies. These values were used to calculate a weighted average value of $12,995,000.

IRS Approach to Value

The IRS's appraiser also calculated a cash flow value, an asset based value, and a value based on the price of shares of publicly-traded companies.  His approach produced a weighted-average value of $33,515,000. 

The stark difference between the value conclusions of the two appraisers was primarily attributable to two factors.  First, the IRS appraiser assigned considerably more weight to the asset value approach, as compared to the cash flow approach.  The asset value was considerably higher than the cash flow value.  By comparison, the estate's appraiser gave more weight to the cash flow approach than to the asset approach.  Furthermore, the estate's appraiser applied a 25% haircut to the cash flow approach value to reflect the fact that the limited partners of GLT would have to pay income taxes on the partnership's income.

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IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.


 



Hempstead & Co. is an independent financial consulting firm specializing in the valuation of businesses and corporate securities. During our 30 years in the profession, we have prided ourselves on the high quality of our work. We would welcome the opportunity to be of assistance to you.



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