AICPA votes to exclude new BV glossary from standards
The AICPA Forensics and Valuation Services Executive Committee has voted not to adopt a proposed new glossary of terms into its valuation standards. This is welcome news for valuation practitioners who had concerns about making the new glossary part of the authoritative standards.
Massive overhaul: The new glossary was issued in exposure draft form with comments due January 31. The document, International Valuation Glossary—Business Valuation, is the result of a collaboration of the ASA, AICPA, RICS, TAQEEM, and CBV Institute and represents a massive overhaul of the existing version. It contains many more technical terms and methodologies, some of which have emerged since the current version was published in 2001. The AICPA sought comments on the content of the glossary and whether it should be included in the AICPA’s Statement on Standards for Valuation Services (VS Section 100).
In a letter to the BVWire editor (published here), Dr. Michael A. Crain (Florida Atlantic University), former chair of the AICPA BV committee, expressed concern that the inclusion of the new glossary in the standards could increase risk for practitioners and pointed out that it may be better to issue the glossary in nonauthoritative form, such as a practice aid. During a BVR “power panel” webinar, leading practitioners agreed that risk could be increased, especially in a litigation context. Some of the new glossary entries include methodologies that are unknown to some practitioners, so opposing counsel could ask the practitioner whether he or she used the methodologies listed. A “no” answer could seriously impact the expert’s credibility in the eyes of the court. An attorney who represents accounting professionals in professional liability matters also agreed, telling BVWire that the “proposed revised documents increase the potential for professional risk.”
Unanimous vote:The vote not to adopt the proposed new glossary into the AICPA valuation standards was unanimous, according to an announcement from the AICPA FVS committee. The announcement also noted that all feedback on the exposure draft was evaluated and will be shared with the glossary’s working group.
LLC buyout at fair value poses ‘conundrum’ for the court
In allowing LLC members to buy out a departing member to avoid the dissolution of the company, a court had to determine the fair value of the departing member’s interest in a holding company. The court, in large part, relied on the fair market valuation the remaining members’ BV expert performed, which was premised on an orderly liquidation of the company.
The plaintiff and the defendants owned a limited liability company (TONG). The plaintiff owned 37.5%, whereas the defendants owned 62.5%. TONG’s only asset was its 100% stock ownership in another holding company, Palm Park, which owned three properties. Neither TONG nor Palm Park were involved in managing the properties.
The plaintiff sued the defendants for constructive fraud and judicial dissolution. The court initially concluded TONG should be dissolved as a matter of law. But, in an amended final judgment, the court, under the applicable state statute, found the defendants had the option of buying out the plaintiff’s membership interest.
Net asset value approach: Both parties agreed the net asset value approach was appropriate to determine the fair value of the plaintiff’s interest in TONG. Only the defendants offered a valuation from a BV expert, who said he was retained to “determin[e] the Fair Market Value of a 37.5% Membership Interest in [TONG] on a control marketable basis” as of the valuation date. The expert’s fair market value determination was based on a hypothetical “orderly liquidation” of TONG, including the sale of Palm Park. Under the orderly liquidation premise, the expert accounted for capital gain taxes related to the various transactions and other obligations a liquidation would trigger. He concluded that the fair market value of the members’ equity in TONG was worth almost $3.1 million and the plaintiff’s 37.5% interest was worth a little less than $1.2 million.
The plaintiff objected that the liquidation premise made no sense where the defendants elected to purchase Horizon’s interest in TONG instead of having the company be liquidated so that the defendants could continue to benefit from the investment in TONG and Palm Park “as a going concern.” Therefore, the court should not give any weight to the expert’s valuation.
The court disagreed. It noted that “there is no dispute that the orderly liquidation premise is an accepted method for determining the fair market value of holding companies” (referencing IRS Rev. Rul. 59-60). Further, the court said, fair market value was concerned with a hypothetical sale involving a hypothetical buyer and a hypothetical seller. It “is not determined by deciding the price that would be arrived at by the specific buyer and seller involved in the particular transaction under consideration.” The likelihood of liquidation was not a proper consideration for determining the FMV of the plaintiff’s interest in TONG “and is not a basis for refusing to consider [the expert’s] valuation report.” However, acknowledging that the case did present “something of a conundrum,” the court said it would consider the fact that there would not be an actual dissolution when assessing the equities of the case. At the same time, “it would be a sad end to the unfortunate story underlying this case” if the buyout would jeopardize the continued existence of Palm Park. In an effort to conclude the lawsuit quickly and enable the parties to get on with their respective business lives, the court found the fair value of the plaintiff’s interest was $1.65 million.
A digest of Finkel v. Palm Park, Inc., 2020 NCBC 84 (Nov. 18, 2020), and the court’s opinion are available to subscribers of BVLaw.
IVSC seeks candidates for financial instruments board
The International Valuation Standards Council (IVSC) is looking to recruit up to three new members for its Financial Instruments Standard Board. The board, formed in 2018, guides the development of international valuation standards for financial instruments and recently issued an exposure draft (comments due April 19). Individuals appointed to serve on any IVSC board serve for a term of three years. Applications are due by March 31. For details, click here.
Online master’s program in BV begins April 1
The application deadline is March 15 for the spring semester of the online master’s in business valuation (MBV) program at Florida University Southeast (FUSE), and classes start April 1. At the recent Second Annual Conference on the Art and Science of Business Valuation, Heidi DiCicco, FUSE president, talked about the program, which consists of three semesters (six months each). After successful completion of the first semester, students will receive the credential of Business Certified Appraiser (BCA) from the International Society of Business Appraisers (ISBA). By the end of the program, students will have successfully prepared a portfolio having four different financial analysis and valuation reports. FUSE MBV graduates meeting the standards of International Association of Certified Valuation Specialists (IACVS) credentialing will automatically be granted the International Certified Valuation Specialist with Advanced Studies in Financial Instruments (ICVS-A) credential without having to complete a separate comprehensive examination on valuation concepts. In addition, the MBV prepares students to sit for the Level 1 Chartered Financial Analyst (CFA) examination, and various business valuation and appraisal certifications, such as the Certified Valuation Analyst (CVA), Certified Business Appraiser (CBA), and Accredited Senior Appraiser (ASA).
For a copy of the 2021 MBV program, click here. The course scheduling is flexible and can accommodate the student’s work schedule no matter where the student is geographically.
Agenda available for Energy Valuation Conference May 12
A post-COVID-19 outlook for the energy sector, downstream refineries, upstream reserves, oil and gas valuations, and complex infrastructure assets are some of the topics on the agenda for the Houston Chapter of the American Society of Appraisers (ASA) Energy Valuation Conference on May 12. BVR will present a live webcast of the conference, now in its 11th year, which will feature nationally recognized speakers who are profession leaders. Early-bird pricing is available through March 31. For more information and to register, click here.
Global BV News
New online guide to valuation standards around the world
The folks at Valuology have compiled profiles of the valuation regulatory infrastructure in over 100 jurisdictions around the world. The profiles include such information as legal and regulatory requirements for valuations, the use of International Valuation Standards (IVS), the existence of local valuation professional organizations (VPOs), whether the VPOs issue their own standards, and more. Marianne Tissier (Valuology) tells BVWire that she also did a paper based on the profiles, titled “The Path to Global Valuation Standards: Ambition and Reality.” To access the profiles and the paper, click here.
Preview of the March 2021 issue of Business Valuation Update
Here’s what you’ll see:
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“Price Versus Value: A Transaction and Litigation Perspective” (Craig A. Jacobson and Richard B. Peil, B. Riley Advisory Services). According to disciples of modern portfolio theory and its efficient market hypothesis, shares of public companies should always trade at a price equivalent to their economic value, making it impossible for investors to experience short-term arbitrage profits. But try to explain that theory to any hedge fund manager or day trader who purchased or sold GameStop Corp.
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“Monetary Remedies in Trademark Infringement Litigation” (Stanley P. Stephenson and Gauri Prakash-Canjels, Litigation Economics). Remedies in the Lanham Act are used to punish wrongdoers in trademark infringement litigation, but courts applying that law have dealt differently with some key issues, especially monetary remedies. This article outlines some such problems and how the courts have dealt with them.
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“The NICE DLOM Method Gets a Few Shots in the Arm” (BVR Editor). The nonmarketable investment company evaluation (NICE) method, which first appeared in 2006, is included in leading valuation books, but it has not gained much traction and had not appeared in any court cases—until now. Plus, a streamlined version of the model will be out soon, according to the method’s developer, William H. Frazier (W.H. Frazier & Co. Inc.).
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“Using a Discounted Cash Flow Methodology in Uncertain Times” (Ronald L. Seigneur, Seigneur Gustafson LLP). A fundamental look at the method taking center stage during the pandemic. This article outlines how the DCF method works and to highlight the nuances and trap doors that will be encountered and must be overcome to reliably apply the method to derive an indication of value that is well reasoned and supportable for the application intended.
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“Assessing Additional Economic Risk Due to COVID-19 (Update)” (Ronald L. Seigneur, Seigneur Gustafson LLP). This is an update to a previously published template that can serve as a framework of thinking about the impact of the coronavirus on a subject company. The author presents a series of questions that help assess the short- and long-term risks with respect to the subject company’s industry, physical operations, financial issues, and firm management.
The issue also includes:
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BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”
The International Association of Certified Valuation Specialists