BVWire has mentioned TAF’s monograph series frequently, but Monday at the ASA/CICBV Business Valuation Conference in Miami, Chris Mellon (Delphi Valuation) reviewed the importance of the their The Identification of Contributory Assets and Calculation of Economic Rents. “If you are involved in the valuation of intangible assets, this monograph is a necessity,” says Mellon. The monograph, issued May 31, 2010, was sponsored by the Appraisal Foundation and developed by a working group of six business appraisers, with support from a Task Force on Best Practices for Valuations in Financial Reporting and a group of Contributors.
Of the many components of the monograph outlined by Mellon, Handling Negative Excess Earnings in a Given Year (§3.1.11) is especially important for experts valuing early stage companies or companies with negative earnings. “Valuation specialists should take special care when an individual year’s excess earnings are negative as a result of the application of CACs,” Mellon advised. “In some cases, a negative value may indicate that there is no economic basis for recognizing the asset, he added. “Also, a negative value for an asset within a portfolio of assets may need to be offset against positive values of the remaining assets within the portfolio or recognized as a distinct liability. And a negative excess earnings amount for a given year within a projection period associated with a subject intangible asset should not be disregarded in measuring the fair value of that asset.”
The 60-page monograph and the additional CAC Toolkit that expands on the data in the CAC Monograph is on The Appraisal Foundation’s website in the section “Financial Reporting”.