In Economic Substance Analyses Valuation analysts and other financial advisers are often called on to perform economic substance analyses in federal income tax challenges. In these cases, the Internal Revenue Service challenges a tax deduction or loss related to a taxpayer transaction by applying the so-called economic substance doctrine. This doctrine allows the Service to disallow a taxpayer transaction i ...

Forecasting “But-For” Revenue for Lost Profits In this article, the author provides a brief discussion of each major approach considered in an economic damages engagement and then discusses circumstances in which multivariate analysis could provide the greatest benefit in formulating a comprehensive damage model. ...

This blog discusses the four-step process for providing fair value marks for venture capital fund investments in pre-public companies: 1) examining the most recent financing round economics, 2) adjusting valuation inputs to the measurement date, 3) measuring fair value, and 4) reconciling  and testing for reasonableness.   Sujan Rajbhandary, vice president in Mercer Capital’s Financial Reporting Valuation G ...

Scenario planning, an effective decision-making tool under uncertainty, is underutilized by organizations primarily due to deep-seated cognitive biases that exist.  Drew Erdmann, Bernardo Sichel, and Luk Yeung of McKinsey & Company tell managers how to address these common biases and provide guidance along with a practice cheat sheet on the dos and don’ts of scenario planning. Read more on scenario plan ...

Dispute Defensible Best Practices (Part 1 of 3) TIn this first part of a three part series, the author suggests that while there are many articles about how to properly analyze a life insurance policy to determine its value, the critical analysis that is needed is not to ascertain value, but to determine viability. Professional advisors involved in buy-sell and exit and succession planning will want to foll ...

Healthcare Valuation Considerations when Valuing Outpatient Services With healthcare evolving, how can practitioners project the future benefit stream related to outpatient services? In this article, the authors discuss the use of hypothetical and extraordinary assumptions. They argue that use of these assumptions requires careful consideration as they can have a significant effect on value. In addition, th ...

In this post, Samantha L. Albert, senior financial analyst with Mercer Capital, talks about the FASB’s Simplification Initiative which is designed to make small changes to GAAP that will reduce costs and complexity, while maintaining or improving the usefulness of financial statements. One potential change announced on May 21, 2015 is to ASC Topic 805. The FASB has proposed modifying standards related to ho ...

Cram Down Interest Rates (Part II of II) In this two-part series the author provides as overview of the issues confronted by courts and financial experts involved in a commercial real estate (CRE) bankruptcy. Read the first part in this series here. In this second part, the author continues the discussion regarding how a financial expert may go about to determine the appropriate interest rate for the underl ...

Conducting Due Diligence on the Expert and Setting Expectations of the Expert Witness in a Litigation Engagement One of the risks of doing business today is getting involved in business disputes. Disputes take many forms. Disputes can be resolved through negotiation, mediation, arbitration, or litigation. Business disputes are frequently complex and the parties involved are sophisticated and motivated to su ...

M&A is an infrequent occurrence among business development companies (BDCs). “Under the external management model, the opportunity for material cost savings is limited, and prices at or near NAV indicate that investors assign little ‘franchise’ value to the lending and origination platforms.” Travis W. Harms, of Mercer Capital’s Financial Reporting Valuation Group, discusses the recent acquisition of MCG Ca ...

Cram Down Interest Rates (Part I of II) In this two-part series the author provides an overview of the issues confronted by courts and financial experts involved in a commercial real estate (CRE) bankruptcy. In this first part, the author discusses how a financial expert may go about to determine the appropriate interest rate for the underlying claims and analyze the CRE market. In the second part of this s ...

Assessing Solvency, Fraudulent Transfers, and Liability When Distributions are Made to Minority Shareholders The recent U.S. Tax Court case of Kardash v Commissioner, T.C. Memo, 2015–51 provides guidance regarding transferee liability and underscores how valuations are used to determine when and if a subject company is insolvent. The case also summarizes a number of defenses used (and rejected) to counter a ...

Fairness opinions are offered by financial advisors, primarily, investment bankers on behalf of the Board of Directors who rely on them when considering a significant corporate event. The fairness opinion says that the impending transaction is fair from a financial point of view of the subject company’s stakeholders. As Jeff K. Davis, Managing Director of Mercer Capital’s Financial Institutions Group, expla ...

Understanding the Magic Mediation is an exceedingly simple and yet extremely powerful dispute resolution process. Principles, process, and prerequisites coalesce to produce the magic of mediation. Those understanding the essential three “P's” of mediation benefit by becoming better negotiators, thus producing more satisfying results and enjoying higher settlement rates. ...

As a Fraud Deterrence Tool Trained forensic professionals investigate accounting and financial transactions that are, or will become, subject to legal proceedings. It is an early step in a potential war, and many times it is the first shot. Attorneys and c-level executives are often not familiar with forensic techniques and see it as a means to quantify a loss. Financial forensics also provides a means to d ...

An increasing number of industry pricing experts are advising CPA firms to consider replacing their billable hour pricing with a fixed pricing or value pricing model.  Author and consultant Ron Baker and the Journal of Accountancy have a question and answer session to discuss the conversations that firms must have in order to implement value pricing.  They talk about questions CPAs should ask during the con ...

The Structure of Physician Compensation The structure of compensation for hospital/health-system employed physicians is a constant struggle for administrators with the rise of physician practice acquisitions and subsequent employment of these physicians. Based on estimates from Jackson Healthcare1, approximately 35 percent of all physicians are employed by a hospital/health-system. As a result, the issue of ...

Creating Value for Business Owners and Board Members In this article, Edward Mendlowitz, CPA, ABA, CFF. shares his views regarding the importance of having a business valued. He identifies 50 ways that a valuation professional can provide something far more valuable than a number. While the valuation profession is under pressure to reduce costs or prepare a report, the business owner is better served in the ...

The requirements that S corporations must meet may be challenging but any violation of the rules may result in an inadvertent termination of an S corporation’s status.  Sally P. Schreiber, senior editor with the AICPA Magazines & Newsletters team, outlines the S corporation requirements and talks about the seven types of trusts that qualify to be S corporation shareholders.  She discusses how the IRS is ...

Part 2: AIRA Issues New Standards for Distressed Business Valuation In this second article on AIRA Standards, the author discusses unique issues valuing distressed companies. These include the standard of value used, the premise of value, the intended use of the valuation, and cost of capital. The author also discusses the use and level of acceptance of the Industry Risk Premium (IRP) in the bankruptcy/reor ...