FASB guidance helps define ‘principal market’

BVWireIssue #110-2
November 9, 2011

The FASB has given appraisers and valuation analysts some recent guidance in defining market participants, said Mark Zyla, who led BVR’s Advanced Workshop on Valuation Issues in ASC 805 session last week. The FASB has defined the concepts of “principal market” as well as “highest and best use” and “most advantageous market,” Zyla said. Even though the FASB standards are written for SEC companies, “they help when doing private company appraisals,” he added.

Generally, the principal market has “the greatest volume and level of activity for the asset or liability,” Zyla said. Importantly, if the entity is able to access this market, then “the fair value is the price in the principal market, even if there is another market with a better price.” Fair value is determined in the most advantageous market “only when there is no principal market, or the entity cannot access it.”

Based on the latest comments by Evan Sussholz from the Office of the Chief Accountant at the SEC, Zyla suggested that analysts consider the following factors when looking at potential market participants and ask how their characteristics compare to the reporting entity’s:

  • financial vs. strategic buyers
  • national vs. regional competitors
  • financial capacity
  • acquisition strategy
  • marketplace synergies
  • market share
  • complementary assets; i.e., a group of assets might be worth more than the sum of its parts
  • management capabilities: if the principal market participant acquired the assets, does it have the management capacity to develop them?
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