The new tax law, lively debates, new guidance, a strong protest, and a simpler approach to estimating cost of capital were just some of the highlights in the business valuation profession during 2018. Entering its 25th year, the Business Valuation Update (BVU) monthly newsletter and online repository of articles continue to capture the latest thinking in methodologies as well as current news and analysis, changes in regulations and professional standards, publications of interest, and practice-building ideas. Here are some of the notable developments of 2018, which were extensively covered within the pages of the BVU.
The Tax Cuts and Jobs Act, enacted in December 2017, took center stage in 2018 and was on the mind of every valuation expert. The first impression from experts was that it will impact almost every aspect of business valuation in a variety of contexts. How the new tax law is implemented affects business cash flow, operations, and long-term strategy that will impact all business valuations. In general, businesses will be more valuable because of the new law’s tax breaks that will increase cash flow. It is now necessary for valuators to have more in-depth discussions with management to make sure its plans and projections reflect the use of any expected tax benefits. It is also more important than ever to consult with a tax professional about the tax impacts of the new law on your subject company.
Other regulatory matters of interest in 2018 included:
- The Public Company Accounting Oversight Board (PCAOB) has a new board and is working on standards designed to address ongoing audit deficiencies in fair value;
- The Department of Labor (DOL) kept up its tough crackdown on ESOPs, which included valuations. In October, members of Congress asked the White House to intervene; and
- A Court of Appeals struck down the DOL’s fiduciary rule, which had originally proposed to include ESOP appraisers in the definition of fiduciaries (this decision created a conflict among circuits).
Standards and guidance
At the annual National Association of Certified Valuators and Analysts (NACVA) conference, two charts were presented that compare U.S. and international business valuation standards. The result: The standards do not conflict, and all basically say the same thing. In the past, regulators and others have perceived that the different sets of standards somehow were at odds with each other, but this is not the case, according to the analyses. The U.S. chart compares the standards set by NACVA, IBA, AICPA, ASA, and USPAP, and the international chart compares the standards from the IVSC, RICS, and the CICBV.
Additional guidance issued in 2018 included:
- The Appraisal Standards Board issued a Second Exposure Draft of proposed changes for the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP);
- The AICPA issued an exposure draft of a “performance framework” that establishes parameters of documentation requirements for its Certified in Valuation of Financial Instruments (CVFI) credential;
- The Alternative Investment Management Association (AIMA) issued a Guide to Sound Practices for the Valuation of Investments; and
- The AICPA’s Financial Reporting Executive Committee issued an early working draft of inventory valuation guidance that is part of the upcoming Business Combinations Accounting and Valuation Guide on how to estimate the fair value of inventory acquired in a business combination in accordance with FASB ASC 820, Fair Value Measurement.
ABV credential protest
The AICPA’s decision to allow non-CPAs to be eligible for the Accredited in Business Valuation (ABV) credential spurred widespread criticism. An Open Letter to the AICPA, signed by several prominent CPA/ABVs, stated that doing so will dilute the credibility of the ABV credential, confuse the public, harm the reputation of CPAs, and impact “the financial well-being of current and future CPA/ABVs by assisting non-CPA appraisers to better compete with CPAs.” In addition, the letter takes the AICPA to task for not being transparent in the process. The AICPA stood its ground while some state CPA societies also criticized the change.
The AICPA Council (the AICPA’s governing body) reconsidered the change during its October meeting, and members voted in favor of continuing to implement the change. While this clears the way for other qualified professionals who are not CPAs to be allowed to qualify for the ABV credential, we may not have heard the end of this matter.
Alternative cost of capital resource
In late 2018, BVR launched a new platform, the Cost of Capital Professional, which is designed as an independent, transparent, and less complex resource rooted in academics. One idea behind the new platform is that skill and professional judgment should be aided, not replaced by, a “black box” of complicated mathematics. Data for the platform is from multiple sources, including the University of Chicago’s Center for Research in Security Prices (CRSP) data, Professor Aswath Damodaran’s data resources, and the U.S. Federal Reserve on Treasury bond yields. The platform allows the user to choose the period of historical return data for the analysis.
In addition, the growing complexities of various aspects of business valuation—especially in estimating the cost of capital—prompted an interesting article, “Have We Lost the Forest for the Trees,” by R. James Alerding, that speaks to the danger of a valuation analyst merely following a model or process at the expense of professional judgement and the “art” of valuation.
It’s no great revelation that business valuation experts often disagree with each other. Some of these disagreements played out on the pages of BVU during 2018. The use of statistics in analyzing the transactional databases was one issue that sparked a lively debate. One point of argument concerned the minimum number of transactions that should be used from a database such as BIZCOMPS or DealStats. According to one expert, at least 30 transactions should be used. No, say other experts, the minimum should be five transactions. And that’s not the only fiercely debated point. Other bones of contention include stratifying the data, filtering, the R-square coefficient, harmonic mean, minimum number of transactions, the elimination of outliers, market multiples, and more, so the debate is not over.
Valuators also dueled over the matter of calculation engagements. An article, “’Breaking Bad’ in the Business Valuation Profession,” asserted that the increasing use of calculation engagements “seriously compromises” historical valuation standards of reliability and independence. The author feels that the dangers of calculation engagements are that they are being offered in contexts for which they were never intended, are prone to bias, and confuse users who don’t know the difference between a calculation and a full valuation. Several valuation experts wrote a rebuttal article, “Calculation Engagements: The REAL Story,” that made the case for calculation engagements and discussed recent AICPA guidance on this matter.
In recognition of the fact that business valuation is a global profession, BVU has offered ongoing coverage of the international scene. The International Valuation Standards Council (IVSC) has seen a 70% increase in membership in the last two years, and all new members have committed to adopting the IVSC’s International Valuation Standards (IVS). In many of the IVSC-member countries, government agencies have adopted the IVS, such as in Saudi Arabia, Indonesia, and Mexico. Also, many other valuation professional organizations (VPOs) such as CICBV in Canada, ANEVAR in Romania, and recently the Pan-American Union of Valuers in Latin America (UPAV) have adopted the IVS as part of their membership requirements for business appraisers.
Looking forward in 2019 …
To read more about notable developments in 2018 such as the fair value credential, approaches and methodologies, and practice-building tips, download the complete BVU article. Plus, be sure you don’t miss a beat on 2019 business valuation developments with a subscription to the BVU monthly newsletter and online article library.