Auditors have trouble agreeing on what happened last year--no wonder they struggle when forced to validate forecasts. Gerald Mehm (American Appraisal), talked about how important--and evolving- the concept of market participant is to supporting forecasts.
"The question is what other market participants would expect as metric or assumption," Mehm told attendees this morning at the ASA Advanced Business Valuation Conference. Since he's the chair of the committee that drafted the AICPA Practice Aid on business combinations, his opinion on this matter is well formed. "The history of this discussion goes back decades to a committee made up of two appraisers and over a dozen auditors," Mehm jokes. And, of course, the language of willing and able to transact, similar to USPAP's willing buyer and seller language, has been generally maintained.
Highest and best use of the asset, as referred to in ASC Topic 820 and elsewhere, is also influenced by the market participant term. A troubling aspect there, of course, is that the highest and best use is determined based on the use of the asset by the market participants, even if the intended use of the asset by the reporting entity is different. "One of the problems here is that how are you supposed to do the impairment testing," Mehm asks. "As long as you wash the synergies out of the projections, you'd assume you've got market participate-level projections left. But you can't really tell how another owner would include projections, but the impairment test has to be based on the strategy of the current acquirer," he points out. It's a complicated logical loop, and it could be argued that the SEC overstretched when it added this concept to 820. "How are you supposed to test some one else's strategy for impairment of assets controlled by your current client," Mehm asked.
There was some progress here in the revisions of what is now ASC 805--which allows the fact that if some one paid the most for an asset, it was probably OK to assume that that's the highest and best use. "You don't have to worry too much about what the second and third highest bidders might have done with the asset," Mehm said.
As they developed the Practice Aid, Mehm and the committee recognized that market participants would include competitors in the same line of business as the company being acquired. Appraisers should also consider as market participants "only those potential buyers with the financial wherewithal, or ability to obtain it, as well as a plausible post.combination operating strategy for the valued assets," he explains. All potential buyers other than financial players who would not be involved in active management of the assets should be considered, he notes.
ASC 805 and 350 are very concerned about limiting the concept of market participants "to the assumptions contained in developing estimated future can flows, whereby entity specific synergies were eliminated," he said. The third TAF working group is now working on what is being called the "market participant acquisition synergy" premium, so Mehm acknowledges that the work of this group will impact how every one looks at the concept of market participant. "It's no longer called the control premium," he said; it's the financial, management, and synergistic aspects of specific groups of market participants.
This document needs to be followed very closely, Mehm argues. He points out the simple question that if you're including a premium for synergy in valuation conclusions, do you need one synergistic market participant to justify it? Two? A dozen? "This will affect all of my acquiring clients," he says.