After meeting three times to discuss their joint project on Business Combinations (Applying the Acquisition Method), both the FASB and IASB (the Boards) have decided that no new issues or concerns would cause either to re-expose FAS 141R or IFRS 3 and related statements (the Statements). According to the latest project update, “all of the changes made during redeliberations were in response to comments from respondents and will make the Statements easier for preparers to implement.”
Accordingly, both Boards have instructed their staffs "to begin the drafting and pre-balloting process for the final business combinations and noncontrolling interests Statements,” which will most likely appear this August. FAS 141R will be effective for annual periods beginning on or after December 15, 2008, while IFRSs 3 will be effective for annual reporting periods beginning on or after 1 January 2009 (effectively the same date).
One possible change: While the FASB currently prohibits an entity from adopting the Statements before their effective dates, the IASB decided to permit early application (with appropriate disclosure). But “my guess is that FASB will change and allow early adoption,” says Al King, in his most recent BVR telephone conference, “Playing and Prospering by the New Valuation Rules” (available here). The FASB is holding an open meeting today, June 13, 2007, at 9 a.m. EDT to “reconsider certain of [its] decisions.” For more information, click here.
Notes from NACVA:
Presenter shows preference for Duff & Phelps data
Congratulations to NACVA for its terrific 14th annual Consultants’ Conference last week in Washington, DC. BVWire™ had a full staff covering the sessions. The meeting confirmed the continued growth of the business valuation profession. Many of the attendees were new NACVA members, participating in their first professional meeting in the field. Next year’s meeting is in Las Vegas in June.
And during his session on calculating the cost of equity capital, presenter Rod Burkert, CPA/ABV, polled attendees and found that just about 15% use data from Duff & Phelps Risk Premium Report, compared to the majority still using Ibbotson/Morningstar data. While the gap has narrowed substantially—and speedily (at an AICPA conference just over a year ago, only 2% of attendees used Duff & Phelps data), Burkert offered his own preference. “I’m not here to persuade you, but I can’t recall the last time I submitted a report using Ibbotson alone,” he said, “because most of the companies we value are smaller-sized”—i.e., below $10 million annual revenue.
Plus, using the current Duff & Phelps equity risk premium (4.9%) eliminates two of the most common questions valuation analysts hear: “Did you (or did you not) use Ibbotson’s supply-side equity risk premium?” and “What about Shannon Pratt’s argument that Ibbotson’s is 1.25% too high?” Analysts can also avoid all the questions about whether pre-1955 economic data are reflective of current equity risk premiums. “The flow of tax-advantaged retirement funds and the change of federal management practices [from tax policy to interest rates] are two key factors,” Burkert said, supporting the use of the more contemporary Duff and Phelps data. For more information on the 2007 Risk Premium Report, click here.
Know thy beta (because it doesn’t always make sense)
Burkert also warned appraisers: “Know the source of your beta.” Bloomberg and others use different measurements and observations, which could understate the beta for a smaller stock target company by as much as fifty basis points. “This is because the lack of trading reduces covariance.”
His comments reminded us of a question that came up during Keith Pinkerton/Pete Butler’s recent telephone conference on “Quantifying Company-Specific Risk,” regarding the computation of beta. “As you know, betas change over time,” the analysts said. “This further supports our technique, which captures timely data and even potentially forward-looking data through the use of implied volatilities (if available). Having said that, one can calculate betas in different ways and the discrepancy can be large.” Do betas always make sense? No—“thus we recommend that when using this technique, analysts calculate beta themselves. It is not hard and Capital IQ does not provide the correlation coefficient, R (at least, not on finance.yahoo.com) which is necessary to calculate Total Beta.”
Free download: Because of the continuing interest in the Pinkerton/ Butler total beta technique, we’ve put together their BVU original article together with two follow-up Q&A’s into a free download, available here. Notably, we’ve just learned that the Pinkerton/Butler duo will be presenting their technique during Roger Grabowski’s day-long Cost of Capital seminar preceding the ASA BV conference in San Diego in late October. Details will be available soon; for a full line-up of the 2007 ASA International Appraisal Conference, July 15-18 in Hollywood, California, click here.
A ‘champagne and strawberries’ divorce
Instead of a “War of the Roses” divorce—try one that ends in champagne, strawberries, and a few tears of relief. That’s how Paul French, CPA, ABV described the conclusion of a case he recently worked on for a wealthy couple, in the relatively new context of “Collaborative Law.” During last week’s NACVA conference, French and co-presenter Frederic Glassman, J.D. explained that in divorce cases, the “collaborative” approach means the parties still hire attorneys and experts—but if they can’t reach a settlement, their professionals are disqualified from appearing in any trial. Both sides still disclose all financial details, but the experts maintain a more neutral than “hired gun” perspective. And the non-adversarial approach not only leads to a successful settlement rate (about 98%) but also to more satisfied clients—and less conflict/contention for appraisers to deal with, which has got to be worth breaking out the bubbly. For more information, visit the International Academy of Collaborative Professionals here. And look for an article on the collaborative law approach for appraisers in an upcoming issue of the Business Valuation Update™.
SEC proposes cutting holding periods in half
The Securities and Exchange Commission is currently considering changes to Rule 144 that would cut the required holding periods for restricted stock in half, from one year to six months, for non-affiliates. Proposed at the end of May, the changes could ease the efforts by microcap companies to raise capital and, among other consequences, have profound effects on financing structures and costs for PIPEs (Private Investments in Public Equity).
How might the proposed rule changes affect calculation of discounts for lack of marketability (DLOM)? For starters, the ongoing controversy regarding Rule 415 (lengthening the time to “effective” registrations) might ease somewhat, as more investors rely on Rule 144, says Espen Robak, CFA (Pluris Valuation Advisors), authors of the Liquistat™ database (See BVWire #56-2). Average private placement discounts might also be reduced slightly.
“However, keep in mind that the Liquistat data suggest that discounts are a concave function of the holding period, meaning that the increment to the discount from six to twelve months is much less than [that] from zero to six months,” he adds. “Given this—and the significant number of private placements with registration rights, I would expect the reduction in average discounts would be moderate.” The SEC’s Proposed Modernization of Smaller Company Capital—Raising and Disclosure Requirements is available here.
Buy-sell audit checklist now available
Business owners need to make sure their buy-sell agreement actually says (and does) what they want it to; professional advisors—including valuation analysts—can assist their clients by defining the elements that should be present in every buy-sell agreement.
To find out more, tune into tomorrow’s telephone conference on the “Planner’s Role in Buy-Sell Agreements,” part two of BVR's and Mercer Capital’s three-part series, featuring Chris Mercer and John Brown, Esq., by clicking here. You’ll also find information on how to obtain a free, forty-page buy-sell audit checklist, by sending your “war stories” on buy-sells gone bad.
Forensic expert diploma for sale on eBay
In a recent eBay auction, a supposed “Forensic Expert" diploma sold for only $17.95, according to Carol Henderson, MBA, AVA, Director of the National Clearinghouse for Science, Technology, and the Law (Stetson University), who gave NACVA attendees a light-hearted look at expert witness fraud. Another favorite fraud story: the one about the expert who tried to pass off a certification—complete with a gold seal—that turned out to be the seal from a bottle of Polish vodka.
On a more serious note, Henderson indicated that a handful of states (CA, MA, NJ, PA, TX, VT, for example) now have published court decisions permitting attorneys to sue their own experts (opposing counsel still can’t initiate such actions). She recommended that anyone with fake expert credentials move to Michigan or Washington, which have expressly disallowed such lawsuits. For another resource, check out summary article, “Expert Witness Immunity?” on the Ethical Challenges for Experts site; it’s the 13th item on the bulleted list.