Contents

• Court and BV Expert Cope With Lack of Financial Data in Difficult Divorce
• Case Includes a List of Facts By Which to Assess a FLP's Non-Tax Business Purpose
• Case Shows the Importance of Distinguishing Lost Profits Versus Lost Business Claims
• Inexperienced, Unprepared Expert Caught in Deposition
• Managing the Explosion of Electronic Evidence with Your Financial Expert
• A Current Snapshot of BV Professional Reporting Standards

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Valuation in the Current Environment

The current economic environment has challenged the valuation community in determining the value of most businesses.  Valuators not only have to deal with the subjectivity of valuation overall, but are now struggling to support some of the most basic valuation issues such as cost of capital and marketability discounts in quickly changing economic times.

The need for increased self-review, research and support for valuation methods utilized has never been greater.  Methods to develop the costs of capital and marketability discounts should look familiar but also include an element to account for the current economic environment.  Additional thought and support should be given to the following areas:

• Treasury bond yields should be adjusted to a more normalized level.
• Equity Risk Premiums should be considerable higher in the current environment.
• Decrease in liquidity, resulting from more stringent lending practices, should lead to higher lack of marketability discounts.

These are just some of the factors that should be noted when reviewing valuations in the later part of 2008 and early 2009.

Our valuation experts are available to discuss these issues with you and are capable to address the current economic conditions in a supportable manner.

For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.

Valuations Insights, Second Quarter, 2009

Managing the Explosion of Electronic Evidence with Your Financial Expert

Over the past two years, the professional standards that govern the business valuation (BV) community have seen some significant changes.  What follows is a quick snapshot of the current U.S. standards and the organizations that promulgated them:

• The American Society of Appraisers (ASA). In July 2008, the ASA updated and revised its Business Valuation Standards, including its "Statements on ASA Business Valuation Standards." These revisions significantly expanded the ASA’s required reporting and assignment disclosures.  A new Section BVS-IX now deals with intangible asset valuation and give examples using certain intellectual property. 
• The American Institute of Certified Public Accountants (AICPA). In June 2007, the AICPA released its Statement on Standards for Valuation Services—Valuation of a Business, Business Ownership Interest, or Intangible Assets (SSVS1), effective for all valuation engagements accepted on or after January 1, 2008.
• The National Association of Certified Valuation Analysts (NACVA).  In November 2007, NACVA released its revised NACVA Professional Standards with the same effective date as SSVS1.
• The Appraisal Foundation (TAF). Authorized by Congress in 1989, TAF oversees the Uniform Standards of Professional Appraisal Practice (USPAP), which provides a single framework for standards applying to real estate, personal property, and business appraisals.  The current 2008-2009 Edition of USPAP was released in 2007; it is effective January 1, 2008 through December 31, 2009. 
• The Institute of Business Appraisers (IBA).  The IBA Business Appraisal Standards have not changed since their publication in 2001.
• The Internal Revenue Service (IRS) released its IRM 4.48, Engineering Program, Business Valuation Guidelines in July 2006.  These guidelines apply "to all IRS personnel that are engaged in valuation practice relating to the development, resolutions, and reporting of issues involving intangible property valuations and similar valuation issues."

What do these standards have in common?  All six of these standards:

1. Establish a minimum level of requirements and compliance, beyond which most business valuators are expect to expand their analysis and support;
2. Address both the development of a valuation analysis and its presentation in a written report; and,
3. Address ethics, either directly in the body of the standards or by reference to ethical standards printed elsewhere.

In addition, the standards all require appraisers to consider the three traditional valuation approaches (asset, market and income approach) as well as the applicable standard(s) and premise of value. Marketability and lack of control (minority) discounts should also factor into the analysis.

All of the standards recognize a "full" or "comprehensive" valuation report as the point of departure for defining other report forms, and notably, their reporting requirements for full reports are similar.  Most generally agree that a "valuation" engagement should be clearly distinguished from a "calculation" engagement (if they permit a "calculation" engagement at all), but the definitions and requirements associated with reports other than a "full" report vary.

Finally, all of the reporting standards require appraisers to communicate the valuation process and conclusion in a manner that is clear and not misleading. With the exception of USPAP and the IBA standards, the others also require use of the "International Glossary of Business Valuation Terms," issued in 2001 by ASA, AICPA, NACVA, and IBA as well as the Canadian Institute of Chartered Business Valuators.

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