“Until a few years ago, I cannot recall ‘normalization’ referring to anything other than financial statement normalization (generally the income statement),” writes Ted Israel (Eckhoff Accountancy Corporation), in his introduction to Current Trends in Normalization Adjustments: A BVR Special Report. All that changed in 2008 when the collapse of the country’s financial markets set off the migration from equities to U.S. treasuries, resulting in a reduction of treasury yields to post-World War II levels. This brought on a “new” normalization debate, Israel says, as analysts question whether they need to normalize the risk-free rate when estimating the cost of capital.
Answers are in the special report. In addition to the introduction by Israel, BVR’s report features new articles by Rod Burkert, James Ewart, and Z. Christopher Mercer, as well as simple guidelines on how to keep normalization adjustments separate and suggestions by Duff & Phelps for normalizing the risk-free rates when market yields are abnormally low. Recent legal decisions in which the courts have considered the experts’ normalization adjustments are also included.
These new articles and abstracts “may open your eyes to some things you have overlooked or forgotten, or they may reinforce what you already know and practice,” Israel writes. “Whatever the effect, it is worth your time to read them.”
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