It’s conference season, and BVWire has been listening to and talking with BV thought leaders about hot topics and current developments in the profession.
In a session at the ASA Advanced Business Valuation conference in San Antonio, Shannon Pratt (Shannon Pratt Valuations) and Roger Grabowski (Duff & Phelps) revealed some of what will be included in their new, fifth edition of Cost of Capital: Applications and Examples, which is the most comprehensive book on this subject. They pointed out that they have written this new edition as though they were “talking to the courts” about how this topic should be viewed and treated. It’s hard to believe they can improve on this book, but it appears that they have done just that. The new edition will have additional case studies and updated chapters on SFAS 141, 142, 144, distressed companies, convertible bonds, and hybrid instruments.
Fresh look: They’ve also added a full chapter on the risk-free rate. Based on their research, valuation experts should rethink their position about normalizing this rate. Most analysts do not do this, but, after listening to Pratt and Grabowski, conference attendees and speakers agree that the normalization of the risk-free rate is now something to seriously consider.
We’ll have more details in a future BVWire (free signup) and an expanded article in an upcoming issue of Business Valuation Update (subscription required).
BVWire editors attended the recent AICPA Forensic & Valuation Services Conference 2013 in Las Vegas. Nearly 1,000 attendees were in Sin City hitting the jackpot with some great sessions. Here are a few golden nuggets we’ve picked up.
Shorter valuation reports are now in vogue, it was explained in one session. A show of hands of session attendees found that 50 pages was the average length. The big valuation firms seem to be producing the shorter reports, and the small firms are turning out the 150-page tomes.
Automatic IRS audits can be triggered when the same firm does tax and valuation work. For example, IRS agents in some areas will pull an estate and gift tax return prepared by the same firm that does an attached valuation. Session members were polled, and 60% said their firm does both. Rethink this strategy as it adds risk to clients.
More calculation reports are being ordered and used for purposes not intended by the standards. For instance, attorneys are ordering them to be attached to estate and gift tax returns because they’re cheaper than full reports. BV standards envision their use in limited circumstances, but not litigation. If a calculation report ends up in court or in an IRS audit, you could have a disaster.
Goodwill impairment was the subject of a lot of chatter as the final AICPA Goodwill Impairment Guide has just been released in e-book format (print version coming in December).
Future issues of BVWire will include more AICPA FVS conference coverage.
“Brand new,” “vague,” “untimely.” These phrases were used by the district court presiding over the retrial on damages in Apple v. Samsung to characterize, and dismiss, Apple’s recent attempt to increase the number of patents eligible for lost profits.
In March 2013, the court found that a good portion of the $1 billion damages award to Apple was based on an “impermissible legal theory” and slashed it by $450 million. It also ordered a retrial on damages, which is now in its early stages. Apple told jurors in its opening that it was seeking a total of $379 million in additional damages, including $113 million in profits on lost iPhones sales.
Apple’s former damages expert, the late Terry Musika (Invotex Group), and its present damages expert, Julie L. Davis, a Chicago-based CPA, both built their lost profits damages model on the four-part Panduit test and, most critically here, on Factor 2, which requires the plaintiff to show that no acceptable noninfringing substitute was on the market. In calculating damages, the experts relied on the assumption that, for three patents related to mobile devices, Samsung would have returned to the market with a noninfringing product that appealed to consumers as much as the infringing smartphones and tablets before Apple was eligible for lost profits on those patents. In other words, Apple could not claim any lost profits for these patents. The experts offered no other model.
In an about-face, 48 hours before the retrial, Apple claimed that it could prove lost profits through an assortment of other evidence of Samsung’s infringing sales. Samsung swiftly filed an emergency motion to preclude Apple from doing so, claiming the alternative theory was untimely and, in any event, unable to meet the evidentiary burden.
The court agreed. “[T]he nature of Apple’s new, non-expert lost profits theory is not wholly clear,” it said. Apple failed to articulate how it intended for the jury to construct its lost profits award, arguing only that it could prove an entitlement to lost profits without relying on its experts. “The Court is not convinced.” The lost profits calculation for one patent survived.
Find a discussion of Apple, Inc. v. Samsung Electronics Co., Ltd., 2013 U.S. Dist. LEXIS 162863 (Nov. 12, 2013), in the January issue of Business Valuation Update. The court opinion will be available soon at BVLaw. Readers can find digests of prior decisions in the case and the corresponding opinions at BVLaw. Subscriptions are required for these products.
On behalf of researchers at the Albers School of Business and Economics at Seattle University, BVWire News would like to respectfully request your participation in a research project on the important issue of fair value judgments. Please put aside about 20 minutes of your time to take a survey that entails reading a brief case and responding to questions.
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BVWire reports that at the recent ASA Advanced Business Valuation Conference in San Antonio, members of the BV Committee were introduced to attendees. The ASA BV area has released a new BV Marketing Toolkit, designed to help ASA members market their valuation practices. Also, a number of the BV courses used for certification purposes are being revised and rewritten to make sure they meet the educational needs of members.
The latest roster of ASA BV committee members is:
Chair: Robert B. Morrison (Morrison Valuation & Forensic Services LLC)
Vice Chair: William A. Johnston (Empire Valuation Consultants LLC)
Secretary: Jeffrey S. Tarbell (Houlihan Lokey)
Treasurer: Raymond D. Rath (Globalview Advisors LLC)
Past Chair: Linda B. Trugman (Trugman Valuation Associates Inc.)
Member: James O. Brown (Perisho Tombor Brown PC)
Member: Chuck Faunce (Gorfine, Schiller & Gardyn)
Member: Erin D. Hollis (AIW LLC)
Member: Bruce A. Johnson (Munroe, Park & Johnson Inc.)
Member: Timothy J. Meinhart (Willamette Management Associates)
Member: Kenneth J. Pia Jr. (Meyers, Harrison & Pia LLC)
Member: Lee C. Russell (Ernst & Young LLP)
Member: David Smith (Hill Schwartz Spilker Keller LLC)
Member: Trey Stevens (Stevens & Greer LC)
Member At-Large: Gregory S. Ansel (Financial Strategies Consulting Group LLC)
Member At-Large: KC Conrad (American Business Appraisers)
Member At-Large: Susan M. Saidens (SMS Valuation & Financial Forensics)
Ex Officio: James M. Hill Jr. (Hill Schwartz Spilker Keller LLC)
Ex Officio: Scott A. Nammacher (Empire Valuation Consultants LLC)
Ex Officio: J. Mark Penny (Hempstead & Co LLC)
Emeritus: Jay E. Fishman (Financial Research Associates)
Emeritus: Shannon P. Pratt (Shannon Pratt Valuations LLC)
HQ Liaison: Stacey J. Talbot (American Society of Appraisers)
Very little has been written about the valuation of self-canceling installment notes (SCINs), but they figure very prominently in a pending Tax Court case, reports the BVWire (free signup).
At the recent ASA Advanced Business Valuation Conference in San Antonio, William Frazier (Stout Risius Ross) talked about the Estate of William M. Davidson. According to Frazier, the case doesn’t have a court date yet, but the IRS has filed a petition claiming that the estate is undervalued and that it owes up to $2 billion in taxes (yes, billion).
William Davidson is the late owner of the Detroit Pistons, Tampa Bay Lightning, and Guardian Industries (one of the country’s largest private companies). In addition to the undervaluation allegation, the IRS is questioning the SCIN technique of selling assets to heirs based on a payment schedule that includes a provision that cancels the payments when the seller dies. The IRS says Davidson made errors in figuring his life expectancy, which caused the heirs to pay much less than fair market value.
If the Davidson estate prevails with the SCIN issue in Tax Court, “you’ll see more of these being used,” says Frazier. Stay tuned!
“I’ve always been concerned about the control studies,” said Gary Trugman, speaking at the AICPA FVS Conference. Because of these concerns, he understands the need in some circumstances to adjust cash flows to reflect minority risks. “But then there are courts like most of the Delaware Chancery which are accustomed to seeing a control premium adjustment to marketable minority values.” So Trugman reminded appraisers to first consider the venue prior to determining whether to apply a control premia. “Normalization adjustments to the cash flows may take care of control benefits.”
More news is now available on replacement products for the Valuation Edition discontinued by Morningstar in October.
Duff & Phelps is now moving ahead to combine the most critical components of the Ibbotson reports within its existing Duff & Phelps Risk Premium Report. The working title of the new book, scheduled to be released by Wiley in March (coinciding with the annual release of the old Valuation Edition from Morningstar), is currently the Duff & Phelps Valuation Handbook/Guide to Cost of Capital.
The Valuation Handbook will include industry risk and new size premia calculations that had been available from Ibbotson—but had not been included in the existing DP Risk Premium Report.
And this book will be available from BVR, NACVA, and perhaps the AICPA as well as from Wiley, BVR has confirmed.
The Risk Premium Calculator, which also includes historic cost of capital data, will continue to be available from BVR and also to NACVA members. Users of the Calculator will receive the new Valuation Handbook.
BVR is also working to re-create the missing Morningstar beta “tear sheets” and calculator as well as to provide a new international cost of capital study. More news on these remaining missing items will be published here as soon as it’s available and also will be posted to the BVR Cost of Capital Resource Center.
The two newest members of the FVS Hall of Fame, just announced in Las Vegas, are Carol Carden and Mark Zyla. Both are heavily involved in AICPA leadership but were cited particularly because of their extensive contributions to professional education—through the BV schools held by FVS and other training opportunities … extra congratulations as you join this illustrious group, Mark and Carol, from your friends at BVR!
The mood here is celebratory, including the new “history of the ABV” video, starring such media stars as Mike Crain, Tom Hilton, Ed Dupke, Butch Williams, and more.
Current Hall of Famer Kevin Yeanopolis congratulating one of the 2013 AICPA FVS winners Mark Zyla
The Town Hall this morning got underway with congrats to Tom Burrage and Bob Bray who are ending their terms in FVS leadership and, of course, to Ron Seigneur, the 2013 conference chair for the business valuation sessions at the annual conference. Ron was supported by the committee including Randie Dial, Rosanne Aumiller, Travis Harms, Stacy Udell, and Charles Willhoite. The new executive leadership of the section begins with Carol Carden (Pershing Yoakley), the new chair of the FVS Executive Committee. She’s joined by the new Business Valuation Committee Chair Randie Dial (CliftonLarsonAllen) and Bill Kennedy (Berkley Research Group), who is the ABV Credential Committee Chair.
Carden started by mentioning the new FVS Online Professional Library, which mostly includes the various forensic and business valuation Practices Aids. New aids on goodwill impairment and in process R&D valuation issues are due out in the next 90 days from FVS.
The FVS also put out two white papers this year: Valuation and Transactional Issues Associated With Employee Stock Ownership Plans and Dual Mutli-Period Excess Earnings in the Valuation of Intangibles. More are planned for early 2014.
There’s also an increased emphasis on international issues. First, the Council and the AICPA Board are starting to offer specialized credentials internationally. Initially, the rollout is to Canada with the CFF. There’s no word on when the ABV will joint the fray and become yet another competing BV designation internationally (RICS, IACVA, and others are already in that game—and there are increasing national associations offering or considering BV certification programs).
The FVS also has participated outside the profession—offering comment letters to the Department of Labor on its changes to the term “fiduciary” and also in response to the Appraisal Foundation’s Valuation of Customer-Related Assets. The FVS is also providing a member to TAF’s business valuation committee, beginning in 2014.
This is the 15th anniversary of the ABV. Ed Dupke
has even created a history of the ABV: CPA/ABV—The 15th Anniversary
. It’s available at www.aicpa.org/abv15
. There are now 3,125 credential holders and 26 admittees to the BV Hall of Fame. Sixty-three new ABVs have been awarded in the last 12 months, with more due during the fall exam.