"It will be useful [emphasis supplied] to report value-based information."

Thus do Messrs. Miller and Bahnson place the final nail into the coffin of the two unfortunate letter writers who dared disagree with them. These eminent professors are devotees of the school of rhetoric that believes if you say something often enough, it must be true, and somebody out there will believe it.

In their column in the Sept. 6-19, 2004, issue of Accounting Today, the professors must be getting desperate, inasmuch as they seem to have made few converts despite multiple repetitions of the same point.

If that were all there was to it, this would be a tempest in a teapot.

The bad news, however, is that the Financial Accounting Standards Board seems to agree with them. In the recently issued exposure draft on fair value measurements, the board makes the following statement: "Users of financial statements generally have agreed that fair value information is relevant."

To which I respond, "Relevant for what?"

In their article, Miller and Bahnson chide an appraiser who had the nerve to state to them in a letter that determining the "value" of an intangible asset might be difficult in the absence of market transactions. As an appraiser who has personally valued over $100 billion of assets in some 35 years, I must say that the letter writer has an excellent point, which the columnists cannot simply brush off with ad hominem attacks.

This writer has challenged FASB to support their assertion in his response to the ED (Letter No. 5 on the FASB Web site).

Defenders of the position that value information is useful, including Messrs. Miller and Bahnson, as well as FASB, should answer three questions:

1. Can the same asset have different values at the same time?

2. Can management intent as to what will be done with an asset affect its value?

3. If an asset is not going to be sold, and in fact cannot be sold or exchanged, what is the cash flow information to a statement user of knowing the "fair value" of that asset?

If an asset can have different values at the same time, how should preparers and auditors choose which is the "correct" or "relevant" answer?

If management intent affects value, and FASB in particular is adamant against using management intent in financial reporting, how do we resolve the fact that value does depend on intent?

What is the relevance of information that is itself irrelevant? If an asset cannot or will not be sold or exchanged, how does "fair value information" help users to understand the future cash flows of that entity?

The latter, of course, is the single most important objective in FASB's own concept statements, and an objective that this writer totally supports.

An Olds example

To keep this response to a reasonable length, we will use a single example, although multiple examples are readily at hand.

What is the fair value of the Oldsmobile trade name?

General Motors has owned and used the "Oldsmobile" trade name for at least 70 years, and the brand itself is over 100 years old.

About five years ago, GM announced that in three years it would cease making Oldsmobile cars, but would continue to support existing vehicles for some period of time. Assume for this discussion that FASB or the Securities and Exchange Commission had required GM 10 years ago to develop, and then disclose, the fair value of self-developed intangibles, including trade names such as Oldsmobile.

Further assume that the writer had been retained by GM to determine the fair value each year.

Until GM announced the discontinuance of Oldsmobile as an ongoing brand, the fair value of the Olds name, assuming that Olds' annual revenues were then perhaps $10 billion, might have been 2 percent of that per year. This would be $200 million a year, which, when capitalized at perhaps 10 percent, gives an estimated FV total of $2 billion. This value would have been derived from an income approach utilizing a "relief from royalty" assumption.

At that point, the cost approach to value - what it would cost to replicate the brand name - would have been irrelevant, because nobody would spend, say, $5 billion to re-develop an existing name. The value of the Olds trade name 10 years ago would have been based solely on future revenues to be derived from the trade name. There is a third approach to valuing assets, called the market comparable approach, which looks at what the "market" would pay for the subject asset. In this case, there was no market for the Oldsmobile trade name because there was zero chance of GM selling it.

On the day five years ago that GM announced the discontinuance of the Olds brand, there would have been a significant drop in the FV of the brand. But in terms of future cash flows, the real impact on shareholders was the overall drop in production volume, the excess production capacity, and the impact on existing Oldsmobile owners who no longer would be expected to buy Olds cars in the future.

The drop in brand value, per se, was a result of other factors, not significant to shareholders in and of itself. The Olds brand name value, if computed on future income, would be a wasting asset over the subsequent years, up to the point that no more Olds cars were made and sold.

Now let's look at the value of the Oldsmobile brand name to GM today. The future income for GM is virtually nil; on an income basis one would assign a very low value.

But in terms of one of FASB's favorite concepts, e.g., "market participants," the Oldsmobile name still has a lot of value. Imagine Kia, or Hyundai, or a Chinese car company. Would they like to acquire the Oldsmobile name? You bet! It would be a very reasonable assumption that any of those companies would readily pay $1 billion in total over the next 10 years, in order to be able to sell in the U.S. their version of "Oldsmobile." One can easily think of a marketing campaign by Toyota, for example, where the tag line could be: "Oldsmobile is back and better than ever."

Would GM management ever let this happen?

If I were a betting man, I would bet that the only chance the Oldsmobile trade name would have of ever being sold or licensed to another car company would be through a bankruptcy court. It is hard to imagine GM management voluntarily letting a competitor use a 100-year-old trade name to compete with GM.

So, what is the value of the Oldsmobile name to GM shareholders in 2004? Zero, or $1 billion? It cannot be both! What cash flow will GM realize from Oldsmobile? In practice, none. It could theoretically be sold or licensed for $1 billion. In practice, it won't be sold or licensed.

Now let's look at the three questions with which I challenged Messrs. Miller and Bahnson, and even FASB:

1. Can the same asset have different values at the same time? The Oldsmobile name can be worth either zero or $1 billion depending on your assumptions.

2. Can management intent as to what will be done with an asset affect its value? The value of the Oldsmobile brand name is a direct function of GM management intent.

3. If an asset is not going to be sold, and in fact cannot be sold or exchanged, what is the cash flow information to a statement user of knowing the "fair value" of that asset? What would have been the relevance of the $2 billion value of the Oldsmobile trade name 10 years ago? What information content would a value placed on the Oldsmobile brand name have today, irrespective of the amount or how it was calculated?

The editors of Accounting Today have chosen to name the Miller/Bahnson columns "The Spirit of Accounting."

One would have to be dealing with an 86-proof spirit to find much solace in fair value information for assets that cannot and will not be sold.

Alfred M. King, Ph.D., is vice chairman of Valuation Research Corp.

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