The AICPA BV Standards are here

Some doubted the day would come, but after years of hard work, exposure drafts, debate, and more work to reconcile varying interests among its constituencies, the American Institute of Certified Public Accountants, through its Consulting Services Executive Committee, has just released its Statement on Standards for Valuation Services No. 1 (SSVS No. 1) “Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset.” According to the official statement last week, the new valuation standards will apply to all:

AICPA members who perform an engagement that estimates the value of a business, business interest, security or intangible asset for numerous purposes, including sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management and financial planning and litigation.

SSVS No. 1 is effective for engagements accepted on or after January 1, 2008.  “The AICPA has an ongoing responsibility to issue guidance to CPAs in major areas of practice, including valuation services,” says Mike Crain, Chair of the BV Committee.  “We will offer education to our members on SSVS No. 1 so that they will be able to integrate it into their client work.” Currently, the AICPA has posted a “Valuation Standard Implementation and Toolkit,” including a copy of the Statement, presentations, and an FAQ.  (In particular, Questions 11 and 12 note when the new standards apply—and when they do not.) To find out more, click here.

Will Ibbotson’s become obsolete in a matter of months?

“Public and private markets have no positive correlation,” said author, entrepreneur, and investment banker Rob Slee at last week’s IBA 2007 National Symposium (see next item, for more on this eye-opening, information-packed conference).  “If we’re grabbing data from one side to measure the other, we’re doing a disservice.  We have to clear this up,” he said, adding that it should be appraisers’ “main mission” to provide business owners with clear, comparable financial information by which to create long-term value and competitive advantage.

Slee is doing his part: He’s currently working with two academic institutions to develop “PCOC”—(pronounced “peacock”), a Private Cost of Capital model based on equity risk data from banks to private business owners.  “Goodbye Ibbotson’s, CAPM, and the build-up method,” he said.  In six to nine months, when PCOC is ready to launch, “we’ll have apples-to-apples” comparisons based on current return expectations of private financial markets. 

Will PCOC data be based on required or realized rates of return?  “Both,” said Slee, but admitted that while business owners and other data providers may know the former, they don’t always know the latter.  Slee’s website is quiet on the project (and he admitted that his academic partners, U. Miss. and Pepperdine, want to keep it that way, until PCOC is in the final stages).  But for those with more questions, Slee will be teaching a full-day course for the IBA in the fall, and will speak again at the AICPA’s National BV Conference in December.  

‘Blood in the aisles’ at the IBA National Symposium

The temperatures in Denver were high—and so were the levels of debate at the Institute of Business Appraisers’ 2007 National Symposium, where brawls supposedly broke out in the session on Quantify Company-Specific Risk (by Keith Pinkerton and Pete Butler), and the four-hour presentation on Tax-Affecting (by Chris Treharne, Dan Van Vleet, and IRS appraiser Leslie Avener) raised more questions than consensus.  But hyperbole aside, the word most commonly heard in the hallways was “excellent,” as participants once-again commended the IBA’s teaching format, which provided four hours per session to dig into each topic, eliciting as much education as excitement—even if the discoveries weren’t always pretty.

For example, “The days of vague testimony and vague opinions are over,” said Jack Bogdanski, in his refreshingly clear look at federal tax practice for appraisers.  “Not all tax court judges are on the ball, but most of them are”—and most are engaged in the appraisal issues to a new level of intensity and sophistication.  But the tax judges are not always getting the outcomes right or deciding consistently with each other, especially in the S Corp and discounts arena.  Recent reversals by the 2nd and 5th Circuits, focusing on burden of proof, suggest the days of courts “cobbling” values from the parties’ disparate appraisals may be over as well.  “If you’re on the side with the burden of proof,” he said, “your opinion has got to be good.”

Bogdanski also senses an “outright hostility” from the federal bench toward appraisers, an alarming trend apparent in the recent Kimberlin case (May 2007), where the judge documents each mistake by the IRS appraiser, a “former ski instructor” whose testimony “went downhill fast.”   For an abstract of the Kimberlin case (which appears in the July 2007 Business Valuation Update™), click here.  A complete round-up of the IBA’s excellent symposium will appear in the next (August) issue of the BVU.

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FASB forms resource group on valuation standards

Based on feedback to its Invitation to Comment on the need for valuation standards—over eighty comment letters, to date—and its recent April roundtable (see BVWire # 56-3), the Financial Accounting Standards Board is forming a resource group to provide more input on whether guidance is needed in applying SFAS 157 principles to fair value information required under U.S. GAAP.  According to last week’s announcement, the new group will draw members from a cross-section of auditing, accounting, and valuation professionals with significant experience in fair value and SFAS 157-related issues.  The group will hold its first meeting in third quarter 2007.

Judging from the April roundtable, the group may well focus on deciding the need for separate standards—or just additional guidance on SFAS 157.  In particular, at the meeting one FASB board member kept bringing up client bias, persistently challenging participants such as Bruce Bingham (representing the ASA) and Paul Barnes (Duff & Phelps) whether their current valuation conclusions were “supportable” or mere “opinion.” The dialogue with Paul went something like this:

FASB: How do you control for client bias?
Paul: This presupposes there is client bias.
FASB: I guarantee you there is client bias.
Paul: Our role is to reach our independent valuation conclusion according to [FSAS 157].
FASB: Is it supportable, or your best opinion?

To listen to the three-hour April roundtable by audio webcast, click here.  To review the eighty-plus comments received by the FASB on its Valuation Standards project, click here.

Retail/wholesale trade still dominate S Corps

Since the first S corporation elections appeared in 1958, the wholesale and retail trade division has dominated key financial measurements under both the Standard Industrial Classification (SIC) system and the North American Industry Classification System (NAICS).  As reported in the Spring 2007 IRS Statistics of Income Bulletin, back in 1959, the wholesale and retail trade division represented 44.4 percent of all S corporations filed, or nearly 32 thousand out of the 71 thousand returns.  Some forty-five years later, for the tax year 2004, wholesale and retail still represent the largest portion of total receipts, total deductions, portfolio income, total net income (less deficit), and total assets for S Corp filings.

To access the Spring 2007 SOI Bulletin, click here; the item on S corporation filings, with a link to related S Corp statistics, is at the bottom of the page.

Are analysts worth as much as first-year lawyers?

Don't feel guilty about billing high for expert witness engagements.  "New associates at leading law firms are being hired at $160,000,” Hon. Edwin Torres of the 11th Judicial Circuit told attendees gathered for lunch at NACVA’s 14th Annual Consultant Conference in Washington, D.C.  “I was once a first-year associate so I know that they're not worth that much."

What do consumers think?  “The publicity irritates corporate clients, who understandably don't want to bankroll the training wheels of novice lawyers," reports the San Francisco Chronicle.  “And partners grumble when they take a hard look at the statistics: 37% of associates leave their firms within three years, long before firms have had a chance to recoup their investment.”

Appraisers head for Hollywood

Business valuation education is going to the movie capital of the world: In conjunction with its 2007 International Appraisal Conference July 15-18 in Hollywood, California, the American Society of Appraisers will hold a day-long series of BV seminars.  The all-star line-up includes an IRS update on the all-important Pension Protection Act, followed by Ashok Abbott (West Va. Univ.) on what the last three years have done to the discounts for lack of liquidity and marketability, while Mark Sarchet (Trenwith Valuations) will review SFAS 141 and the impact of changes associated with SFAS 141R.  Dennis Webb (Primus Valuations) will also explain how to integrate the sometimes wide-ranging facts and circumstances related to real estate and business appraisals when valuing asset-holding companies as well as common tenancy interests.  For more information, visit the ASA conference website; latest reports show the conference hotel nearly sold out.