At the recent NYSSCPA business valuation conference in New York City, Daniel Van Vleet (Stout Risius Ross) told the audience that the Van Vleet model (S corporation economic adjustment model) is being used for the first time in a pending U.S. Tax Court case. What’s more, both the IRS and the taxpayer are using it in this case, says Van Vleet.
Ongoing conflict: A much-debated issue in the valuation community is tax affecting the earnings of a pass-through entity (PTE), and there is no definitive answer. The tax-affecting issue has been argued in a number of Tax Court cases (most notably the Gross case). In all of these cases, the IRS and the Tax Court have refuted the notion that shareholder-level taxes affect a firm’s value, so the valuation conclusions in these cases were based on earnings not being tax affected. The valuation community disagrees, so a number of models were developed that are designed to reflect the impact of shareholder taxes on value.
The pending case is Cecil et al. v. Commissioner of Internal Revenue, and it involves a gift of shares in the Biltmore Co., which operates the famous Biltmore estate, a Gilded Age mansion built by the Vanderbilts that is now a tourist attraction. The Cecils (descendants of the Vanderbilts) valued the stock gift at $20.88 million, but the IRS said those shares are actually worth $95.29 million. The valuation difference is due to the Cecils’ use of going-concern value, while the IRS says a liquidation value makes more sense. Details of the case and specifics on the valuations have not been disclosed because the case is ongoing.
For more, go to BVWire.
Shannon Pratt, Roger Grabowski, Jim Hitchner, Nancy Fannon, and the Honorable Judge David Laro of the Tax Court are just a few of the valuation thought leaders dubbed by NACVA as “industry titans” who gave presentations at the organization’s 25th anniversary conference in San Diego. BVWire was there, and here are some notable quotes from a few of the early sessions.
- “The valuation method that is best, whether for large or small target companies, is the one for which you have the strongest support,” says Fannon.
- Pratt, Hitchner, and Jay Fishman are the authors of a new book, A Consensus View: Q&A Guide to Financial Valuation. “But the one area where we could not come to a consensus is whether you apply a DLOM to controlling interests,” says Hitchner. “I don’t do it and Fishman doesn’t do it, but Pratt says it’s OK.”
- In terms of supporting a DLOM, Pratt says: “The pre-IPO studies have received a bad rap because people haven’t adjusted the data for time periods.”
- What are the option models of choice? “We’ve been using John Finnerty’s option model heavily (rather than Black-Scholes) at Duff & Phelps, but we never rely entirely on one option model,” says Grabowski. He pointed out that studies show that actual market behavior is different than what Black-Scholes theory suggests.
- “I’m coming to the conclusion that appraisers should include a sensitivity analysis in their reports so the judges can see the impact of assumptions,” says Judge Laro. “That would make a huge difference in how reports are received by the courts.”
Full coverage of the conference will be in August issue of Business Valuation Update.
Last year, the Public Company Accounting Oversight Board (PCAOB) issued for public comment a staff consultation paper on potential standard-setting activities related to the auditor using the work of specialists, including valuation professionals. The University of Wisconsin-Madison is conducting a survey on the role of specialists in developing and evaluating the fair value estimates used in audited financial statements. This research may help in the PCAOB’s standard setting in this regard. You can take the survey if you click here. When you complete the survey, you will receive a $10 Starbucks gift card.
At the recent NYSSCPA business valuation conference in New York City, BVWire News had the pleasure of speaking with one of the principal investigators on this research. Stephani A. Mason (DePaul University) told us that the data collected will be confidential and that a second phase of the study will involve optional interviews of survey respondents. Mason provided us with the following explanation of the research:
“As the use and complexity of financial instruments that require fair value measurement (FVM) has increased, so has the complexity of audit procedures required to determine the reasonableness of FVMs. Several studies and regulators have observed that some aspects of FVMs are relatively new and difficult for auditors as well as their clients. This difficulty in FVM has led to the widespread use of valuation specialists (specialists) by clients and auditors. Studies have focused on the auditors’ role in evaluating the clients’ FVMs and auditors’ use of valuation specialists’ reports, however there is little understanding on the valuation specialist’s process. Audit firms, the PCAOB (the Board) and academics have all indicated a need for a better understanding of what specialists do and how auditors work with specialists as evidenced in PCAOB Staff Consultation Paper No. 2015-01 The Auditors’ Use of the Work of Specialist and the comment letters issued in response to the more than forty questions raised by the Board. This study is designed to fill this knowledge gap and is important for several reasons. First, examining how specialists analyze FVMs is key to understanding the preparation of and the audit processes surrounding FVMs. Second, our study will also provide insights to auditors by enhancing the understanding of how specialists perceive and perform their tasks. Lastly, our research will inform regulators on the role valuation specialists play in determining and evaluating FVMs, and inform accounting educators seeking to prepare students with the procedural knowledge and skills necessary for effective preparation and audits of FVMs. This study has been funded by the IAASB (International Auditing and Assurance Standards Board).”
BVWire News urges readers to participate in this important research.
Now is your chance to contribute to the largest and most thorough analysis of best practices in the business valuation profession. Join your peers in responding to BVR’s Firm Economics Study to see how growth and change is accelerating in the business valuation profession. Once all responses are compiled, the Firm Economics Study will show you where your firm falls in relation to your peer firms’ performance, compensation, billing rates, marketing and practice development, and more. The survey, which is now open, will result in the largest and most thorough analysis of best practices in financial management, marketing, human resources and compensation, and professional and ownership standards that you will find anywhere. BVR conducts this confidential survey regularly to help appraisers benchmark and improve their practice management.
Those who participate will receive a free Executive Summary of survey results, plus a special offer to purchase the full report for $99 (regular price is $299). The deadline for responses is July 8, 2016. Click here to participate now.
There was a full house at the recent ASA/USC 11th Annual Fair Value Conference in Los Angeles. BVWire was there, and here are a few takeaways from some of the sessions, all of which were excellent.
- Comments are due June 24 on two exposure drafts related to the new fair value credential, Anthony Aaron (E&Y) reminded the audience (see the BVWire for more details). Aaron is the chair of the performance requirements workstream group for the Fair Value Quality Initiative designed to strengthen fair value in financial reporting.
- When valuing a financial instrument, consider its principal market, advises Kristopher Shirley (SEC), who says the agency sees problems in this area. He says that, if you identify a market but can’t access it, you can’t rely on it for the valuation, but you can use it as an input.
- The FASB will soon issue an invitation to comment about internally generated intangible assets, says Adam Kamhi (FASB), to determine whether this should be added to the FASB’s rule-making agenda (current rules don’t allow recognition on the balance sheet).
- A proposed guide on valuing contingent consideration will be out in a “few months,” says Alok Mahajan (KPMG), chair of the working group under The Appraisal Foundation.
More coverage of the conference will be in the August issue of Business Valuation Update.
BVWire attended the recent annual business valuation conference of the New York State Society of CPAs (NYSSCPA) in New York City. It was an excellent conference, and here are a few takeaways:
- George Wilfert of the PCAOB said that there’s an increase in the number of audit deficiencies regarding auditors’ testing of fair value measurements associated with business combinations. He also mentioned that the standards for auditors’ use of specialists, such as valuation experts, will be changing.
- The DOL continues its crackdown on ESOP valuations it perceives as faulty, according to Thomas Leroe-Munoz and Daniel Schiffer, both part of the DOL’s ESOP enforcement efforts. The DOL/GreatBanc Fiduciary Process Agreement serves as overall valuation guidelines, but Leroe-Munoz told the audience that the agreement is “not a totality of all the requirements.”
- Daniel Van Vleet (Stout Risius Ross) revealed that the Van Vleet model (S corporation economic adjustment model) is being used for the first time in a U.S. Tax Court case, and by both the IRS and the taxpayer.
- Mark S. Gottlieb (Mark S. Gottlieb, CPA, PC) says his firm spends a good deal of time on an industry-specific review because it can be very meaningful in terms of drawing conclusions of value.
- More companies are performing preacquisition valuations, and experts are being called in earlier in the process, according to Raymond Weisner (Valuation Research Corp.). He also pointed out that 50% of clients’ acquisition models have material errors.
For more coverage, see BVWire.
The ASA, AICPA, and RICS have issued two exposure drafts for public comment that relate to the ongoing initiative to improve the quality of financial reporting valuations for U.S. publicly traded companies. The initiative will significantly impact appraisers who prepare financial reporting valuations, and it includes the development of a new credential for valuation professionals. The credentialing process will be subject to ongoing quality oversight and compliance with a “mandatory performance framework,” which is the subject of the new exposure drafts.
Comments due June 24: The two exposure drafts issued are: Proposed Mandatory Performance Framework for the Fair Value Quality Initiative and Proposed Application of the Mandatory Performance Framework for the Fair Value Quality Initiative. Written comments should be sent either to the AICPA, ASA, or RICS and will be available for public inspection at the offices of the respective organization for one year beginning July 11, 2016.
For links to the exposure drafts and contacts for comments, see BVWire.
The concept of compensation forfeiture is an option that damages plaintiffs can seek that is not difficult or expensive to prove. Plus, it can be “stacked” onto other remedies, according to George P. Roach, J.D., who practices almost strictly in damages and remedy law. In an interview in the May issue of Business Valuation Update, Roach also points out that, in some cases, compensation forfeiture may end up to be the only form of damages that can be proven with reasonable certainty.
Extensive uses: Compensation forfeiture is based on the doctrine that dishonest or disloyal employees or agents should not be compensated for any service after the wrongdoing first occurs. “The widespread applicability to various claims is not generally appreciated by either lawyers or damages analysts,” says Roach. “Therefore compensation forfeiture represents an opportunity for a damages analyst sometimes to suggest an enhancement to the client’s claims that can be made at a small increase in professional fees.”
Roach is the author of a new chapter on compensation forfeiture in the newly released 4th edition of The Comprehensive Guide to Economic Damages.
A slew of M&A records were broken in 2015, including net M&A announcements (12,012), $100 million-plus deals (1,197), cash payments (78%), average P/E offered (29.6), and more. This is revealed in the newly released 2016 Mergerstat Review, which gives you quick access to selling price multiples and control premiums paid by industry.
BVWire offers a link to a free download of selected data from the guide, which includes more stats and a table of acquisitions of privately owned companies. It was a stellar year! The download also includes a complete Table of Contents and a full List of Tables.
Although ESOP valuation experts have been exempted from the DOL’s final fiduciary rules (see our prior coverage), it’s still not safe to go back into the water, experts say.
Still lurking: In the final rules, the DOL makes it a point to say (several times) that it is very concerned about this matter and will take it up again in separate rulemaking. “I think the DOL is sending a signal … actually a fairly strong one,” says attorney Bruce Ashton (Drinker Biddle Reath LLP). “So the issue is not dead, just on hold—though perhaps an extended hold.” Ashton’s firm was involved in drafting the DOL/GreatBanc Fiduciary Process Agreement, a settlement agreement that covers ESOP transactions and valuation issues.
Valuation experts we spoke with are happy with the outcome so far. “Stern Brothers Valuation Advisors is pleased to see that ESOP valuation experts are exempted from being named as a fiduciary to the ESOP,” says Steven York, the firm’s senior VP. He points out that the GreatBanc agreement offers “guidelines” for a good ESOP valuation.
Attacks continue: In the meantime, the DOL continues to take action against valuations it perceives as faulty. The agency recently obtained a judgment against fiduciaries of a California ESOP in a lawsuit alleging the fiduciaries paid inflated prices for company stock. The DOL also filed a complaint against owners of a Florida company for selling their stock to their ESOP for almost double the alleged fair market value.
An extended discussion of this matter will be in the June issue of Business Valuation Update.