William A. Johnston, ASA (Empire Valuation Consultants, New York), provided the BVWire with the following abbreviated write-up on The Appraisal Foundation’s recent Discussion Draft:

On June 10, 2008 The Appraisal Foundation released its first Discussion Draft from its Intangible Asset Working Group entitled “The Identification of Contributory Assets and the Calculation of Economic Rents.” The Appraisal Foundation is seeking to tackle key financial reporting issues by forming groups of leading practitioners to address key concerns where there is diversity. Given that there has been limited guidance in the past in the financial reporting realm, these best practices should be quite useful and lead to better fair value reporting for companies.

The Discussion Draft provides a solid framework to work within, and many key issues are addressed. However, not all issues were resolved, including the following:

• Are iterative/circular charges acceptable? (The paper generally discourages such an approach and discusses alternatives).
• Should deferred revenue be included to calculate a working capital charge?
• If working capital is negative, should there be no charge or a “reverse charge”/positive cash flow applied?
• For in-process research and development, should charges be applied when no revenues are being generated?

The issues above do not necessarily have a clear-cut answer. It will be interesting to see where the debate leads us to on this and future efforts by The Appraisal Foundation working groups in establishing best practices for financial reporting valuations.

Bill’s full write-up can be found as a Free Download here.