[IMGCAP(1)]Recent trends in fair value measurement for financial reporting are changing the valuation profession in a variety of ways.
These trends include:
- Concerns expressed by the Securities and Exchange Commission about valuation professionals who measure fair value for public companies.
- Alternative fair value measurement standards for private companies provided by the Private Company Council.
- Increasing internationalization of the valuation profession and valuation standards as a consequence of cross-border mergers and acquisitions.
- Development of best practices by the valuation profession for fair value measurement in financial reporting.
CONCERNS BY REGULATORS
In a 2011 speech to an American Institute of CPAs’ conference, the SEC’s then-deputy chief accountant, Paul Beswick, expressed concern that, unlike the accounting profession, the fragmented nature of the valuation profession has given the profession a “lack of unified identity.” Beswick commented that the lack of consistency of qualifications and experience of valuation specialists performing valuations for financial reporting has resulted in a lack of analytical consistency in the valuation work product. He suggested, “There should be, similar to other professions, a single set of qualifications with respect to education level and work experience, a continuing education curriculum, standards of practice and ethics, and a code of conduct.”
As a result of Beswick suggestion, the institute, the American Society of Appraisers, the Royal Institute of Chartered Surveyors and the Appraisal Foundation, along with the valuation practice leaders of several international accounting firms, began formal discussions to address the concerns of the SEC. The discussions have resulted in a suggested framework for providing common qualifications, oversight, performance requirements and governance of valuation specialists assisting in valuations in financial reporting.
The AICPA recently announced that its Governing Council had approved the development of two new credentials, one for those who provide fair value measurements for business and intangible assets, and another for those who provide valuation of financial instruments. The other valuation professional organizations are expected to provide similar credentials. This process should continue to enhance the valuation profession’s role in the public trust.
The Private Company Council, an advisory group to the Financial Accounting Standards Board, has proposed two alternatives for private companies that impact the fair value measurement of business combinations and the testing of goodwill for impairment. Both proposals have been endorsed by FASB. Private companies can elect to report under the alternative standards, or they can continue to report under previous standards. The alternatives are designed to reduce “the cost and complexity” of measuring fair value for private companies. The first alternative codified under Accounting Standards Updates 2014-02 allows goodwill to be amortized for up to 10 years. Goodwill would only be tested for impairment if a triggering event occurs. Furthermore, the impairment test is a simple one-step test.
The second private company alternative relates to identified intangible assets that are recognized in a business combination. Under ASU 2014-18, a private company making an acquisition would continue to recognize identified intangible assets acquired as part of the acquisition. However, two specific intangible assets — customer relationships (unless the relationships can be monetized in some manner) and non-competition agreements — would not be recognized. Any value that would have been associated with these two assets would likely fall to goodwill.
These two alternatives have a number of implications. Currently, any entity electing the alternatives would have to restate its financials under previous standards if they become a public entity. Making the PCC election and then restating the financial statements would likely be more complex and costly than continuing under previous standards. Unless FASB extends these elections to all public companies, these PCC alternatives may not provide cost savings in financial reporting as originally anticipated. FASB plans to discuss whether or not to extend these alternatives to public companies later this year. Users of financial statements, as indicated by a recent CFA Institute study, have serious concerns about the private company alternatives as is, and would be unlikely to be in favor of extension to public companies.
Additionally, the valuation profession, led by the AICPA and the Appraisal Foundation, has spent a tremendous amount of time developing valuation techniques as best practices for valuation in financial reporting. Techniques such as the multi-period excess earning method and valuation of customer relationships in business combinations have met intense audit scrutiny. They typically require the identification and measurement of all contributory intangible assets. However, under the PCC alternatives, all intangible assets are not identified, measured and reported. These alternatives for private companies may put undue pressure on outside valuation specialists for cost reduction when, in fact, there may not be as much of an actual reduction in the level of work required to perform the fair value measurement.
The prevalence of cross-border mergers and acquisitions has increasingly led to the “internationalization” of the valuation profession. FASB and the International Accounting Standards Board have achieved convergence on accounting for business combinations and some commonality in testing certain assets for impairment.
This convergence has prompted the valuation profession to try to achieve a similar consensus with respect to fair value measurement. The International Valuation Standard Council has issued valuation standards on which many valuation organizations in developing countries pattern their own standards.
Recently, valuation professional organizations in the U.S. and Canada have signed a Memorandum of Understanding with the IVSC to consider adapting their own individual valuation standards so that they will comply with IVS. The IVSC recently had an exposure draft of fundamental changes to that organization’s structure to enhance its viability. In addition to the IVSC, there are other organizations such as the IIBV and the IACVA that provide education and other services to the profession internationally.
Finally, the recent development of best practices within the valuation profession has been a result of the fair value measurements. The AICPA and the Appraisal Foundation have formed working groups to address various aspects of fair value measurement for financial reporting purposes.
The AICPA has recently issued accounting and valuation guides on the fair value measurement of equity issued as compensation, testing goodwill for impairment, and the financial reporting treatment of technology under development.
The AICPA is also working on a guide for best practices in business combinations.
The Appraisal Foundation has issued monographs on a specific valuation technique that measures cash flows to a single intangible asset. Identification of Contributory Assets and Calculation of Economic Rents provides best practice guidance and illustrations for applying the multi-period excess earnings method to a specific intangible asset. The foundation also has working drafts for monographs for measuring premiums paid in acquisitions and measuring the fair value of customer relationships, and it plans to develop best practices for measuring the fair value of contingent consideration paid as part of a business combination.
Recent fair value measurement trends continue to impact the valuation profession. A once-diverse profession is unifying to develop common credentialing and governance for fair value measurements.
Cross-border transactions are prompting the profession to standardize practices internationally. Lastly, the valuation profession is developing best practices for fair value measurements that are likely to have an impact on valuation for other purposes. AT
Mark L. Zyla, CPA/ABV, CFA, ASA, is managing director of Acuitas Inc., an Atlanta-based valuation and litigation consultancy, and the author of Fair Value Measurement: Practical Guidance and Implementation 2nd ed. (John Wiley).
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