Current Trends in Normalization Adjustments

August 2012 978-1-62150-012-4 PDF

BVR (editor)

Business Valuation Resources, LLC

Adjustments to the income stream seem to be part of every business valuation using the income approach — straightforward and free of controversy. Yet, observations on normalization adjustments from the real world indicate there is room for extra guidance and debate.

Current Trends in Normalization Adjustments: A BVR Special Report is a compilation of articles from business valuation leaders that confirm there are no "automatic" adjustments and careful consideration must be given to each one. Facts, circumstances, and context are important. The authors emphasize the significance of classifying and grouping adjustments to provide clarity to valuation report users and your own analysis. It also includes recent court cases in which normalization was an issue.

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Table of Contents:

Introduction
By Theodore Israel, CPA/ABV/CFF, CVA

Normalizing Adjustments - Time to Revisit 
By Rod P. Burkert, CPA/ABV, CVA

Mastering the Art of Normalization Rates
By James D. Ewart, CPA/ABV/CFF, CVA

  • Income v. Cash Flow
  • Why Normalize?
  • Normalization Adjustments-Definitions
  • Categories of Adjustments
  • Ownership Characteristics
  • GAAP Departures, Extraordinary, Nonrecurring, and/or Unusual Items
  • Nonoperating Assets and Liabilities and Related Income and Expenses
  • Traditional Normalization Practices for Noncontrolling Interests
  • Importance of the Site Visit
  • Normalization and the Distressed Economic Environment
  • Questions From Participants
  • Use Four Categories of Normalization Adjustments to Get the Best Cash Flow Analysis
  • The Use of Organization Charts to Describe Normalization Adjustments
    By Mark W. Norris, CPA/ABV, CVA, CFFA, ASA

Normalizing Adjustments Are Potentially Critical in Statutory Fair Value Determinations
By Z. Christopher Mercer, ASA, CFA, ABAR

  • Normalizing Adjustments Explained
  • Type 1 Normalizing Adjustment (Nonrecurring Items)
  • Type 2 Normalizing Adjustments (Agency Costs and Other Discretionary Expenses).
  • Normalizing Adjustments and Statutory Fair Value: Guidance From the Leading Case in New York
  • Conclusion

Simple Guidelines to Keep Your Normalization Adjustments Separate

D&P Suggests Normalizing the Risk-Free Rate When Market Yields Are Abnormally Low

  • Rating Agencies' Warnings and Downgrades
  • So Why the Low Rates?
  • Implications for Cost of Capital Estimates
  • Closing Thoughts and Conclusion

The Dangers of Normalization

Normalization Cases

  • Reis v. Hazelett Strip-Casting Corp
  • Graves v. Tomlinson
  • Blackburn v. TKT and Associates, Inc
  • Pellom v. Pellom
  • Cox Enterprises, Inc. v. News-Journal Corp
  • Ackerman v. Ackerman
  • Eckelkamp v. Beste
  • Friedman v. Beway Realty