Some new changes under consideration on AICPA practice aid on 409A valuations

Neil Beaton offered AICPA National BV Conference attendees a list of some of the updates they're considering as they update the 2004 AICPA practice aid on cheap stock valuations:

  • Adding treatment of debt.  "When the Aid was originally done, most of the financing was venture capital.   Now there's so much private equity, so we need to consider valuation of debt," explained Neil.
  • Clarifying the use of the PWERM methodology including examples of best practices.  "This model considers the probability of the various exit strategies, such as IPO, sale, ceasing operations, or continued operations," said Neil.  "But, we hope to provide guidance on estimating volatility for highly levered companies."  This is particularly important where selling to the founders becomes a exit strategy as people try to recoup losses in a better way than liquidating.  Neil also says that there is a lot better information now on the probability of various outcomes, so we can measure these better than when the original Aid was created.
  • Introducing hybrid methods with examples of best practices.  "You could actually walk through the term sheet you have and do an OPM, for example."  Neil points to a new "backsolve method" that will be demonstrated in the update.
  • Discussing adjustments for marketability and control.  "This is the most controversial and hard fought, and perhaps least understood part" of the cheap stock valuation practice," Neil says.  "Many feel that the discounts are just too high."
  • Applying ASC 820 and its relevance to cheap stock valuation.
  • Providing recommendations on how to apply SEC/FASSB guidance on cheap stock.  "Some of the key considerations include best practices on contemporaneous vs retrospective valuations, and also the new GAAP disclosure requirements," Neil says
  • Including updated cost of capital tables and discussion, to at least include and update information on sources that may not have been available in 2004.
  • Updating the Practice Aid to refer to AICPA SSVS-1