Subsequent Events Revisited

So why do we, as appraisers, differ from judges when it comes to subsequent events?

Traditionally, valuation and litigation support professionals only consider facts known or knowable as of the valuation date, yet courts will look at subsequent events. This article examines how a valuation and litigation support professional may address subsequent events.

Subsequent Events Revisited

The reality of subsequent events hit hard on my last valuation (litigation) engagement.  As I reconsidered the  issue of “subsequent events”, I realized that it might help to revisit this very subject in this short article.   I believe we’re constantly facing this issue, even if we’re not fully aware that it is an issue!

As we have all learned, appraisers use only that relevant information that is “known or knowable” at the valuation date.  Shannon Pratt points out in a March 2002 Business Valuation Update (BVU), that “reasonably foreseeable” should be added to “known or knowable.”  Thus today, we think in terms of known, knowable, or reasonably foreseeable.  To this end, “known, knowable or reasonable foreseeable” has been supported by various business valuation standards in our industry, Revenue Ruling 59-60, and a host of valuation treatises.   Unfortunately, this is not necessarily the view of our courts throughout this land.  In their article in The CPA Journal, September 1, 1995, entitled “Impact of Post-Mortem Events on Estate Tax Valuations”, Ted D. Englebrecht and John J. Masselli, point out that, “Several recent court cases have indicated a potential willingness of the courts to relax the restrictions on the use of post-mortem facts and circumstances in valuation cases.” This article is now 18 years old!

So why do appraisers differ with those judges?  The answer to this question is contained in a superb article published by The Value Examiner, May/June 2006, by Michael J. Mard, CPA/ASA, ABV; Christopher Mercer, ASA, CFA; and LuAnne Tanner, entitled “Subsequent Events Must Be Considered.”  The article states:

“Courts make their decisions at the trial date and are obligated to consider all the evidence duly admitted and made known at or before the hearing or trial. The obligation on the appraiser/expert is not whether to consider the subsequent information, but how to consider the subsequent information.  And the “how to” is a function of the environment, namely the Court of Equity.”

So what, as appraisers, do we do?  For starters, we must do a better job in our interviews with management to detail the subsequent event and the environment in between.  In the tax court case The Estate of Helen M. Noble v. Commissioner, T.C. Memo. 2005-2, January 6, 2005, the court stated: 

“When a subsequent event such as third sale before us is used to set the fair market value of property as of an earlier date, adjustments should be made to the sales price to account for the passage of time as well as to reflect any change in the setting from the date of valuation to the date of sale. (citing  Estate of Scanlan¹)  These adjustments are necessary to reflect happenings between the two dates which would affect later sales price vis-à-vis a hypothetical sale on the earlier date of valuation. These happenings include: (1) inflation, (2) changes in the relevant industry and the expectations for that industry, (3) changes in business component results, (4) changes in technology, macroeconomics, or state law, and (5) the occurrence or nonoccurrence of any event which a hypothetical reasonable buyer or hypothetical reasonable seller would conclude what affect the selling price of the property subject to the valuation.” 

In closing, there seems to be a trend, as Mard, Mercer and Anderson point out, to address subsequent events in a formal section of the appraisal report called “Subsequent Events.”  This section would then describe the event and its effect on the matter being valued.”

Copyright © 2013 by Donald P. Wisehart, ASA, CPA/ABV/CFF, CVA, MST.  Used with permission. July 24, 2013