“Once every decade or so, accountants fret over goodwill and reconsider how best to report it in financial statements—should it be amortised, impaired, amortised and impaired, or something else?” So say Steve Cooper and Dennis Jullens in last week’s edition of their Footnotes Analyst.

“There is no obvious right answer, positions are entrenched, and debate usually gets nowhere,” they begin in “Goodwill Accounting—Investors Need Something Else.”

The goodwill debate, covered extensively by BVWire—UK over the last year, is now coming to the end of yet another of these cycles. The financial professions “need to move on to what really matters—reporting about business value,” the authors argue.

Most business valuers agree that the amortisation schemes financial regulators around the world propose:

• Reduce the amount of information available to investors or analysts; and

• Eliminate the often significant requirement that management attests to the current value of their acquisitions.

The debate about amortising goodwill hides the fact that valuers can rarely look to impairment tests to learn much about the riskiness of a business or its acquisitions either. The authors remind all financial analysts that impairments, if triggered at all, are “almost certainly less” than the business value lost, and those valuations are often shielded by either management resistance or unreported internally generated goodwill from the rest of the business.

Investors learn that goodwill can contain many things—but standards and good practise require business valuers to separate identifiable intangibles. Financial reports may be the last place to look to quantify the intangibles relating to employees, restructuring opportunities, synergies, customer lists, or growth plans.

Cynics might say that the only remaining “unidentifiable” intangible left over in many goodwill conclusions is overpayment. On this topic, The Footnotes Analyst is merciless:

We all know that research shows that the average acquisition destroys value, which is often the result of overpayment. Theoretically this overpayment should result in an immediate impairment loss and not be added to goodwill; however, we cannot recall this ever happening—in part no doubt due to management hubris and in part due to goodwill shielding…. Clearly, ascribing a useful life to the overpayment component of goodwill is meaningless.

The authors conclude this thoughtful analysis by supporting business valuation as the only solution. “Eliminating goodwill through immediate write-off (generally expressed as a deduction from equity in the form of a consolidation adjustment, rather than reporting an expense) is not new. It was applied in several jurisdictions prior to their adoption of IFRS and was permitted under IFRS prior to 1993…. This does not mean that goodwill should be ignored—far from it. We think that information about goodwill and about business combinations is important and should be part of wider reporting about business value.”

The High Court upheld an infringement decision last week (the original case [2021] EWHC 1212 (Ch) came before Mr Justice Marcus Smith in February 2021) that affirms the need for all business valuers to fully analyse ownership rights of any IP assets as part of their work. In this case, the UK licensors, registered sublicensors, and apparently off-brand abusers were all named as defendants, and the Chancery Division had to sort out the chain of liability. In the end, both the original decision and this recently argued new appeal determined that, since the direct owner of the trademark license had not infringed, none of the other defendants were liable. Some legal analysts say that the decision makes it harder for owners to enforce their rights, as well as the value, of their trademarks.

At the start of COVID-19, the Investment Association (IA) released guidance suggesting that, where a registered company raised additional capital from shareholders or accepted government support to pay for furlough employees, annual bonuses to executives should “not be expected.” Last week, IA repeated the guidance and extended it through 2022 and perhaps any period of financial difficulty in the future.

IA guidance is not directed at small or family-owned enterprises, but valuers may want to review their assessments of discretionary cash flows available to controlling interests in light of this new statement regarding executive compensation in 2022.

Since increases in base salary drive many executive incentive plans, the IA also suggested that firms—and their auditors—take extra care when base compensation may have a “knock on” effect for long-term compensation as well.

The revised, sixth edition of Understanding Business Valuation by Gary Trugman (Trugman Valuation) is available for preorder for an early 2022 release. The update includes digital access to new sample valuation reports and other materials, which is why it’s been used as a training text for so many financial experts who need to upgrade their business valuation skills. Preorder Understanding Business Valuation here.

Subscribers to BVResearch Pro or BVR’s Digital Library will receive access to the book automatically as part of their subscription.

The new edition includes:

• An expanded section on personal goodwill;

• Additional samples for business valuation report writing, including guidance for creating rebuttal reports;

• A companion website with access to further data and case studies; and

• Much more.

BVR will also release training modules for every section of the 6th edition in early 2022. This will make the book a unique learning asset for any valuation firm with new business valuation employees.

A new study by Alexander Davie (FTI Consulting) offers the best available analysis of “The Use of Relative Valuation Methods in Investment Arbitration.” Not only does Davie fully compare the differences in the use of all valuation methods when specifically applied to arbitration, but UK business valuers will all benefit from his complete review of investment arbitration awards in which tribunals considered the use of relative valuation methods.

The article appeared in the 17 November 2021 issue of Global Arbitration Review, and it considers both thepractical difficulties in the application of relative valuation methods as well as the response to relative valuation methods by investment arbitration tribunals.

While relative valuation methodologies using comparables and multiples are the most common means of determining value in commercial situations, they are often overlooked or underused in investment arbitration, Davie reports. This places increased emphasis on DCF analyses, “the method most commonly used to calculate ‘forward looking’ market values in investment arbitration,” Davie concludes.

Arbitration cases may rely on customised interpretations of both EV/EBITDA and EV/revenue multiples, he says.

To draw his conclusion, Davie references the following cases for guidance on what business valuers can expect from the courts in arbitration situations:

• Tidewater Investment SRL and Tidewater Caribe, CA v the Bolivarian Republic of Venezuela (ARB/10/5);

• Sistem Mühendislik Insaat Sanayi ve Ticaret AS v Kyrgyz Republic (ARB(AF)/06/1);

• Waguih Elie George Siag and Clorinda Vecchi v The Arab Republic of Egypt (ARB/05/15);

• Yukos Universal Limited (Isle of Man) v The Russian Federation (PCA Case No. AA 227);

• OI European Group BV v Bolivarian Republic of Venezuela (ARB/11/25); and

• Crystallex International Corporation v Bolivarian Republic of Venezuela (ARB(AF)/11/2).

13-17 December: US AICPA Virtual Business Valuation School, live—online

17-18 February 2022: ICAEW Advanced Valuation Techniques, virtual classroom

14-16 September 2022: IVSC Annual General Meeting, Fort Lauderdale, FL

3-5 October 2022: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

Want to share a news item? Have feedback or comments? Please contact David Foster at ukeditor@bvresources.com.

Want to share a news item? Have feedback or comments? Please contact
David Foster at ukeditor@bvresources.com.