Preview of TAF guidance on the company-specific risk premium

BVWireIssue #260-3
May 15, 2024

company-specific risk
ASA, cost of capital, fair value, risk analysis, the appraisal foundation (TAF), company-specific risk premium (CSRP)

In the last issue, we mentioned that auditors are looking for more quantification of the company-specific risk premium. A reader reminded us that The Appraisal Foundation (TAF) issued a brief (click here) that provides a summary outline of certain key areas that will be explored in greater detail in upcoming guidance from a working group on this topic.

Too subjective: The brief points out that “a CSRP is often subjectively applied without identification, quantification, or support of its underlying risk components.” This is “inconsistent with financial reporting best practice, which suggests that quantitative support should be provided for valuation inputs and assumptions.” The brief also states that there is nothing in the published literature on specific guidance or best practices on quantifying a CSRP.

The forthcoming guidance will be in the form of a Valuation in Financial Reporting (VFR) Advisory, and it will provide specific procedures for assessing discount rates and prospective financial information (PFI), as well as identifying and quantifying the elements of a CSRP. This would be the fifth VFR—the others deal with contributory assets and calculation of economic rents, customer-related assets, the market participant acquisition premium, and contingent consideration. You can find them all if you click here.

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