Fair value engagements—communicate early & often

BVWireIssue #65-2
February 13, 2008

In the complex (and often controversial) world of fair value for financial reporting, business valuators have learned how important it is to talk with auditors at the beginning of engagements, to become aware of any particular issue or interpretation that might factor into the auditors’ expectations.  Remember when four different auditors took three different views on tax affecting?  (See BVWire™ #56-4)  When these same panelists assembled for the BVR/ASA first annual National Summit on Fair Value last week in New York City, each offered his opinion on the most critical element of SFAS 157 fair value measurements:

  • Peter Wollmeringer (KPMG): The concept of highest and best use
  • Matt Pinson (PricewaterhouseCooper) : The unit of valuation used to assess highest and best use
  • Stamos Nicholas (Deloitte Financial Advisory Services): Levels 1, 2, 3, in the hierarchy of value and in particular, the supportability of Level 3 inputs
  • Arthur Miller (Ernst & Young): Defensive Value and moving away from the entity's own intended use of asset

Likewise, in his overview of equity compensation valuations, Neil Beaton emphasized the importance of talking to auditors early, to discuss the specific purpose of the engagement, whether for 409A (income tax compliance) or 123R (financial compliance)—or both.   “The driver of a 409A appraisal is often financial reporting for equity compensation expense and, ultimately, 123R option valuation,” he said.  While 409A valuations are geared toward the individual, 123R takes the company perspective.  Another astute observation from Beaton and co-presenter Bob Duffy: "If you're doing 123R work, read SAB 107."  This SEC Staff Accounting Bulletin (March, 2005) expresses staff views on the interplay between 123R and certain SEC rules and regulations—in particular, its views “regarding the valuation of share-based payment arrangements for public companies.”  To obtain a copy, click here.

Please let us know if you have any comments about this article or enhancements you would like to see.