One of the most elusive issues in fair value for financial reporting is the identification and application of the “market participant” perspective. “We call it the mythical participant,” Tony Aaron quipped, at BVR’s Fair Value Summit III. “It’s a hypothetical.” The concept has been around for years (think willing buyer/willing seller construct in fair market value). But, “embedded in the concept of market participant are values in use and values in exchange,” commented Neil Beaton  (Grant Thornton), who chaired this year’s event. For example—say you can identify two market participants in the chip industry, but one wants to buy the company, the other wants it as a source of supply.  Which perspective do you apply? “There’s an even harder issue,” added panelist Tom Miller (Quist Valuation). What if a small company’s sole asset is IP—which market participant perspective do you consider: vertical or competitive integration? And do you consider management’s perspective? “Only if market participants would take the same view,” Beaton said.

Final word. “Don’t overanalyze these situations; it will all be speculation unless you have some documented support,” Beaton said. “Do a broad, overall view of market participants rather than a bifurcation, and explain any lack of precision that exists.” Valuation analysts may also want to review a speech by the SEC’s Evan Sussholz on Dec. 7, 2009, which gives agency views on the market participant assessment, including four lists of questions to ask. “Sussholz lays it all out and indicates that the SEC would expect any reporting document to follow its process and assumptions,” Brad Pursel (Brown Smitth Wallace) told FV III attendees. The SEC speech is another example of best practices guidance currently coming from regulatory authorities.