FASB still discussing deferral of 157

In its open meeting today, the Financial Accounting Standards Board (FASB) will discuss “alternatives for a deferral of the effective date” of SFAS 157, Fair Value Measurements.  Notably, according to its most recent announcement, “the Board will also discuss whether to add a separate project to its agenda to address certain issues on the application of Statement 157.”   The Board did not indicate what these issues might be, and as of press time, it had not yet posted handouts for the meeting.  At the same meeting the Board plans to discuss financial statement presentations and comments to SFAS 140-d, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.   The meeting starts Wednesday morning (November 14th) at 9:00 a.m. EST.  To listen live by telephone or audio webcast, click here. 

Appraisal Institute rejects unification efforts

As reported in last week’s BVWire™, the governing boards of the American Society of Appraisers (ASA), the American Society of Farm Managers and Rural Appraisers (ASFMRA), and the Appraisal Institute (AI) met in New Orleans on November 6, 2007 to discuss a proposed interim plan for the “unification of the appraisal profession,” according to an ASA e-update.  Following the initial presentation, the boards met separately to consider the interim plan and its outline for unification, and then took a vote on additional funding for development of a final version, scheduled for a March 2008 release.

The outcome: the ASA and ASFMR Appraisers voted to accept the interim plan and to continue toward unification. The AI rejected the interim plan, as presented, and declined to move forward.  According to Terry Allen, current Chair of the ASA’s BV Committee, “When AI voted against continuing the unification talks, it ended one phase of the unification effort and deflated those who had worked so hard to find a workable format for uniting the organizations.  I hope that this setback does not keep ASA and ASFMRA from continuing unification talks,” she adds.  “I believe there is a good fit between the organizations and we would be excited about the opportunity to unite these organizations.”

NVCA reluctantly endorses valuation guidelines

“While many investors and fund managers agree that financial measurements mean little for the first three or so years of a [venture capital] fund,” says the National Venture Capital Association (NVCA) in its Portfolio Company Valuation Guidelines, “after that, the fund wants to communicate progress to the investors.  This is where specific valuation rules and processes become more important.”   In particular, while portfolio company valuations are “more of an art than a science, especially for pre-revenue and pre-EBITDA companies, “ most limited partner agreements require the venture firm to provide financial statements that comply with GAAP, and since GAAP requires fair value measurements for portfolio positions, “most [funds] must issue financial statements using fair value.”

In its new guidelines, NVCA provides a chronological evolution of valuation in the venture capital industry from 1989 to 2007 as well as its lukewarm support of the Private Equity Industry Guidelines Group (PEIGG).  This “self-appointed group of private equity practitioners” originally published its guidelines in 2004, NVCA says, and then revised them in March of this year to comply with SFAS 157.  “While the NVCA has not specifically endorsed the PEIGG or other valuation guidelines, the NVCA Board…recommends that its members create, follow, and communicate clearly the specific procedures and methodologies used for valuing their portfolios.”  These methodologies should be agreed to by the firm’s investors and conform as required to GAAP and fair value measurements. 

Notably, while members are encouraged to review the revised PEIGG guidelines, “[a]s of this writing, neither the NVCA board nor its Research Committee has reviewed this new document.  In the coming months we expect the NVCA Research Committee to consider re-supporting the new version of the guidelines.”  To read the complete NVCA valuation guidelines, click here.

Company-Specific Risk Calculator goes live

With each article, conference presentation, and hands-on demonstration—most recently at the ASA BV conference in San Diego, where an extra demo was added to accommodate the demand—the developers of the Butler Pinkerton Model™ for calculating company-specific risk premiums (CSRPs) have attracted more followers and won over any remaining detractors.  In fact, one of the last criticisms was that the calculations were too complex or took too long.  “Well, not any more,” says Pete Butler.  The developers have just launched the Company-Specific Risk Calculator™ to quantify CSRPs using market-derived, empirical data. 

Available exclusively through BVResources, the new web-based CSR Calculator takes minutes to perform the work that might otherwise take hours to complete—and provides defensible support for this critical element of company valuations.  It’s a quantum improvement over subjective, “factor-based” models, and it provides analysts (and attorneys) a new element by which to critique reports which don’t use market-driven data to calculate CSRPs.  Take a look at the new Butler Pinkerton Company-Specific Risk Calculator here.

Attorneys more aggressive on solvency valuations

“I enjoyed reading, ‘Should Solvency Valuation Include Ongoing but Undiscovered Fraud?’ in the October BVU regarding the Edgewater Medical Center bankruptcy—and not only because I was the ‘credible expert’ in the case,” writes Patrick McNally, partner in charge of corporate finance consulting at Blackman Kallick (Chicago).  An interesting point in that case: The plaintiffs argued that the failure to exercise a lease option was a fraudulent transfer rather than the actual lease payments.  “It seems, based on my experience as a consultant/expert in several fraudulent transfer matters in the last twelve months,” McNally says, “that attorneys may be becoming more aggressive in the area of fraudulent transfers.” Indeed, a lead article in the current issue of ABA’s The Business Lawyer looks at “Proving Solvency: Defending Preference and Fraudulent Transfer Litigation.”   Look for an article from the perspective of valuation analysts, authored by McNally, in an upcoming Business Valuation Update.

‘Market participant’ concept can’t be ignored

Also overheard at the ASA BV conference in San Diego: One participant likened fair value for financial reporting in general to a “magical mystery tour,” while another called its key concept of market participants “a myth.”   Even so—it’s a myth that can no longer be ignored, according to Anthony Aaron (Ernst & Young), who spoke on SFAS 157.  “Our business valuation reports [prepared for financial reporting purposes] all need to speak to the market participant issue.”    If not, many auditors will assume the appraiser incorrectly overlooked the issue—or didn’t understand it.   Aaron admitted that guidance on defining a market participant is scarce, and may even confuse the concept of fair value.  “But the issue is central to FAS 157 work,” he said.  “You don’t have to be specific, but [auditors are] looking for language that says ‘we understand the concept of market participant as it relates to this valuation, and this is how we considered it.’”

More guidance from the ‘great minds’ of fair value

To hear more from Tony Aaron—along with Bruce Bingham, conference chair Bill Johnston, Stamos Nicholas, Warren Miller, Neil Beaton, and other leading experts in fair value for financial reporting—don’t miss the upcoming National Summit on Fair Value in Financial Reporting, co-sponsored by BVR and the American Society of Appraisers.  The conference faculty will share what analysts need to know about this dynamic and sometimes difficult valuation environment—yet one which holds more business development potential than perhaps any other.  Participants will leave with the tools to leverage their expertise and differentiate themselves from the competition.  Speaker biographies are now available here.  If you haven't taken advantage of early bird pricing for the Fair Value Summit, February 5-6, 2008 in New York City, click here.

Correction—and a new download on liquidity discounts

In our recent item, “New Abbott Analysis Aids Valuators in Assessing Liquidity Discounts,” the following statement should have read (as noted in bold): “Analysts may expect larger DLOL during periods of higher volatility, for example, but the Liquidity Factor shows the impact can be much larger—and more volatile—than many would predict from the historic S&P 500 Index.”  We’ve corrected the archived issue of BVWire # 61-4—and we’ve also posted a new, free download that includes the current Abbott Factor data plus the article, ”New Abbott Analysis Aids Valuators in Assessing Liquidity Discounts,” from the November 2007 Business Valuation Update™, which discusses the data and liquidity discounts in more depth.  To access the free valuation download page at BVResources, click here.