When is it appropriate for highway/heavy construction contractors? This article discusses the appropriateness of using the Asset-Based Approach for minority interests in companies where that approach results in higher value than the Income or Market Approach.
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More often than not, a company’s income statement isn’t a definitive disclosure of its revenue and expenses that investors can interpret clearly, easily and accurately. This is largely because income and expenses, as classified under GAAP, can be difficult to define. According to McKinsey & Company, savvy investors often have to reengineer statements to come up with figures that they’re even remotely comfortable with to use as a starting point in valuing future performance. In a well-written and straight forward article, McKinsey & Company explains the trouble with GAAP-based income statements and offers their “modest” proposal for revisions that…
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Everyone knows that in a merger or acquisition deal, time is not a friend. The longer transfer negotiations drag on without an agreement, the less likely a deal is going to be signed. This is mostly because over time, both parties are more likely to adopt adversarial positions. When things slow down, firms begin to assume the successor isn’t making the transaction a priority and may not the right candidate for their offer. Do they even have the capacity to handle such a venture? With each contract revision, the involved parties continue to reread the documents, often finding new problems…
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As experts, don’t we owe loyalty to ourselves and our profession? The article draws a parallel between the qualities that are needed to obtain the Eagle Scout designation and those that are necessary to serve as an expert witness.
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Fine art collectors and estate taxes Tax and estate planning is complex and constantly evolving. Choosing the appropriate strategy depends on the specific circumstances involved. It is critical for tax professionals, estate planning attorneys, and valuation analysts to understand the client’s precise needs and work collaboratively to achieve their stated goals.
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A view of the use and limits of option models (Part 2 of 2) Option pricing models (OPMs) are increasingly used to estimate the discount for lack of marketability (DLOM) in the business valuation profession. Some analysts disagree about whether OPMs are applicable for estimating the DLOM. Since OPMs were originally derived to determine option prices for publicly traded securities, many analysts question the merits of applying them to closely held securities. This discussion explores the controversies of applying OPMs to estimate the DLOM for nonmarketable securities.
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In an interesting interview with the Risk & Compliance Journal, David Hoffman, forensic accountant and managing director at Acuitas, Inc. discusses the status of the lawsuits that resulted from the bank failures that occurred in the years following the economic crisis of 2008. At the close of 2013, there were 81 lawsuits involving 127 different banks. Hoffman discusses his role as a forensic investigator in the proceedings, drawing similarities between the current situation and the S&L crisis of the 1980’s. He also shares his view of how current regulations impact his responsibilities within the investigative process and the part technology…
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Beginning this year, the PCAOB is making it a priority to examine whether or not firms that offer non-audit service lines are compromising the quality and accuracy of their audit services by doing so. In yet-to-be-scheduled roundtable discussions with audit firm leaders, regulators are expected to delve into the potential implications for such consulting arrangements. According to PCAOB chairman, James Doty, the review will focus on: 1.) how firms avoid having their best talent work in consulting at the expense of audit expertise and competence 2.) the risks associated with non-audit business lines 3.) how non-audit activities affect resource allocation…
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Business valuation in divorce In this article, Brian Murray examines the risks taken by clients when valuators are hired to “get the numbers” needed to support a desired outcome in divorce proceedings. In most cases, such a preplanned agenda backfires and creates more problems in the end.
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Is there a disconnect between client expectations and advisory services? Valuation professionals are uniquely positioned to help clients identify opportunities and third parties that can take them to a proverbial next level. Business valuation is about more than just benchmarking and deriving a defensible conclusion of value, it should entail understanding the value and interplay of governance, risk, relationships, and knowledge.
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New private company cost of capital model delivers consistent and observable results The Implied Private Company Pricing Line (IPCPL) Cost of Capital Model seeks to eliminate pitfalls for unsystematic risk, liquidity, small stock premium, PTE taxes, and cash/leverage by utilizing real transaction, market-clearing prices between buyers and sellers of comparable small private businesses.
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A view of the use and limits of option models (Part 1 of 2) Option pricing models (OPMs) are increasingly used to estimate the discount for lack of marketability (DLOM) in the business valuation profession. Some analysts disagree about whether OPMs are applicable for estimating the DLOM. Since OPMs were originally derived to determine option prices for publicly traded securities, many analysts question the merits of applying them to closely held securities. This discussion explores the controversies of applying OPMs to estimate the DLOM for nonmarketable securities.
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In an opinion piece for The New York Times, M.I.T economics professor, Michael Greenstone, examines the parallels between Enron, the corporate accounting scandals of the early 2000’s and the sub-prime mortgage crisis/Great Recession of present day. Greenstone points out that the biggest similarity and ethical hurdle in both scenarios is the fact that auditors were hired and paid for by the very firms they were being asked to audit. Naturally, this created an enormous conflict of interest on the part of the auditors to present truthful findings, while at the same time, feeling the pressure to please their clients. Although…
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The U.S. Supreme court recently upheld the 40 percent penalty in gross valuation misstatement when the partnerships involved were determined to be shams with no economic substance and as such, the partners’ outside basis in the partnership was zero. The unanimous decision, written by Justice Scalia, resolved a split among the circuit courts as to whether the penalty applied. The Fifth Circuit Court, where the case originated, and the Ninth Circuit held that the penalty did not apply when the transaction had been disregarded on the grounds of economic substance. The ruling also settled a disagreement among the courts as…
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How to build more personal power At some point in their careers, many executives find themselves short of the power and influence they need to get their jobs done effectively. Fortunately, these problems can usually be remedied as this article by Leslie Brokaw explains.
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Historical perspective and current recommendations The Internal Revenue Service published Discount for Lack of Marketability: Job Aid for IRS Professionals (Job Aid) in August of 2013. Now, two new books provide advice on how to prepare a DLOM and which methods valuators should consider and why. These will help any business valuation practice, whether working on a DLOM for the IRS or any other purpose.
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A help or hinderance? On July 1, 2013, FASB issued exposure drafts calling for public commentary on three proposals that address private company stakeholder concerns. Two proposals involve accounting for identifiable intangible assets and goodwill acquired in business combinations. In this article, Mark Zyla analyzes the proposed changes, including potential concerns, and their far-reaching impact on the industry, as well as private and (in 2014) public companies.
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With the explosion of new social media platforms over the last five to seven years, a dilemma has arisen for business owners in search of new customers or clients. Is the standard company website obsolete? Should businesses be reaching out to potential prospects through platforms like Twitter and Pinterest? With Facebook standing at 500 million accounts, many companies are abandoning their standalone websites in lieu of a page on the social media giant’s site, but is this actually good for business? In an interesting article for Search Engine Watch, Rebecca Murtagh explains how social media is best used as a…
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With the number of retirements in the accounting profession expected to soar over the next decade, many foresee a wave of CPA firm sales happening at the same time. Anticipating the trend, the Journal of Accountancy has offered up its method of valuing a CPA firm, but the method and results differ depending on whether an external transaction or internal transfer is involved. Of particular concern is the sale or transfer of the retiring CPA’s ownership interest. You can get the full breakdown on both approaches regarding each scenario here. [button color=”blue” link=”http://www.journalofaccountancy.com/Issues/2013/Nov/20138232.htm” font=”arial” textcolor=”000″ align=”left”]View Full Article[/button]
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The onslaught of new phones and apps and their related potential for financial crime This article examines the high cost of convenience in regards to constantly evolving smart phones, iPads, and other personal communication device applications. The intentional (and unintentional) transfer of sensitive data between individuals happens in seconds. The author lays out the double-edged benefits of such technology and whether it’s worth the risk of being a victim of fraud and theft.