How to deal with COVID-19 for Dec. 31, 2019, valuations

BVWireIssue #211-1
April 1, 2020

valuation method
subsequent events, valuation report, coronavirus, COVID-19

Several BVWire readers have asked about how to treat the COVID-19 issue when you have a valuation date of Dec. 31, 2019. One reader, Judy O’Dell (O’Dell Valuation Consulting CPA LLC) of Rockport, Maine, was doing a Dec. 31, 2019, valuation for an ESOP transaction with a report date of March 11, 2020. The company, a construction firm with projects underway, is based in Maine and does not conduct business outside of the state. As of the date of the report (March 11, 2020), there were no COVID-19 cases in Maine. “I considered the virus a subsequent event,” O’Dell tells us. “The transaction will close shortly and the trustee raised the issue of whether the value should be decreased knowing what we know now. I referred him to AICPA SSVS 1 concerning subsequent events.” Following SSVS, O’Dell included an appendix to the report that included the language of SSVS No 1 VS Sec 100.43. Here is the appendix (client data redacted):

Appendix A—Subsequent Events—COVID-19

The following disclosure information is provided for information purposes only and does not affect the determination of value of 100% of XXX at 12/31/2019.

The AICPA’s Standards on Valuation Services (SSVS No 1 VS Sec 100.43) addresses the analyst’s responsibility regarding subsequent events:

“The valuation date is the specific date at which the valuation analyst estimates the value of the subject interest and concludes on his or her estimated value. Generally, the valuation analyst should consider only circumstances existing at the valuation date and events occurring up to the valuation date. An event that could affect the value may occur subsequent to the valuation date: such an occurrence is referred to as a subsequent event. Subsequent events are indicative of conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not be updated to reflect those events or condition. Moreover, the valuation would typically not include a discussion of those events or conditions because a valuation is performed at a point in time—the valuation date—and the events described in this subparagraph, occurring subsequent to that date, are not relevant to the value determined as of that date. In situations in which a valuation is meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure in a separate section of the report in order to keep users informed.”

It appears that the first reported case of COVID-19 virus was in China and was reported on 12/1/2019. As of 12/31/2019 there were no reported cases in the United States. The first reported case in the U.S. was 1/14/2019 which is after the valuation date. We considered the COVID-19 virus in the United States to be a subsequent event. Because this valuation is prepared for an ESOP transaction, we consider this valuation to be meaningful to the intended users and thus are providing this disclosure.

The valuation of XXXX does not consider the possible effects, if any, of the COVID-19 virus on the Company. The valuation reflects conditions as of the valuation date, 12/31/2019.

We ran this by veteran business valuer Harold Martin (Keiter) who responded that the expert, “for the most part, has done essentially what I would have done, i.e., citing the applicable professional standards to which the expert is subject (in this instance, AICPA SSVS1) and then describing factually the circumstances that existed as of the effective valuation date. For valuations as of 12/31/19, I would agree with the position taken by the expert.

“Given that the purpose of the valuation was for an ESOP, I would also recommend that the guidance from the U.S. Department of Labor’s Proposed Regulation relating to the Definition of Adequate Consideration be cited. The Proposed Regulation requires that the ‘fair market value must be determined as of the date of the transaction involving that asset.’ [emphasis added] I would also cite the guidance provided in IRS Rev. Rul. 59-60: ‘Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal.’ [emphasis added]

“I would also recommend clarifying the nature of the subsequent event. For example, the issue is that the coronavirus resulted in a pandemic that has adversely affected market conditions. Finally, I would also recommend citing a reputable source for the discussion of the chronology of events to support the appraiser’s conclusion that these events are, in fact, subsequent to the valuation date.”

Our thanks to Judy O’Dell for allowing us to share this with readers and to Harold Martin for his perspective.

Feedback? Do you agree with this approach? Would you do anything differently? Let us know, and we’ll share it with others if you wish.

Extra: Bring your questions to a free town hall-style webinar, Extreme Uncertainty: How Valuation Experts Should Respond to Today’s Volatility and Risk, on April 7, featuring Gary Trugman (Trugman Valuation Associates), Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC), and Michelle Gallagher (Gallagher & Associates CPAs).

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