On 12/7/2023, the American Society of Appraisers (ASA) held its 2023 ASA Fair Value Virtual Conference – Winter.
Below are a few key takeaways from the conference:
Valuation Credentials: The AICPA, ASA, and RICS will be sunsetting the Certified in Entity and Intangible Valuations (CEIV) credential. Ultimately, the decision was that this credential was too costly and that the adoption rate was too low to be meaningful. In turn, the Mandatory Performance Framework (MPF) that CEIV holders were subject to will no longer be mandatory but rather will be revised as a ”best practices” document. The goal of revising the MPF is to streamline, shorten, and simplify the document.
AICPA’s Draft Business Combination Guide (a must-read for ASC 805 valuation projects!) – This guide is in the final phases of its review process – looking at a March/April 2024 timeline for a formal release.
- This guide includes a framework for helping select appropriate valuation methods for various types of intangible assets (pivotal vs. routine assets & IP-based vs. relationship-based). In practice, the ultimate determination of methods used should be based on the specific “facts and circumstances” of the engagement.
- The guide also introduced a profit split concept through a “simulated royalty rate” when applying the relief from royalty method to value pivotal intangible assets. The concern from the AICPA is that IP assets may be undervalued and that a simulated royalty rate analysis might help more appropriately value these types of assets. However, the focus on this topic may be eased up a bit in the final version of the guide with more of a focus on considering adjustments to observed market royalty rates.
- The conference also held a great discussion on how auditors may like to see a de-risked cash flow scenario analysis to support the selected company-specific risk premium (CSRP) when considering a discounted cash flow (DCF) model. This type of analysis considers adjustments to management’s projections (using more conservative growth and/or margin assumptions) and removes the CSRP from discount rate.
Fair Value Audit Review Process – This applies to valuations for financial reporting purposes, which may be subject to audit review processes (financial reporting valuation engagement examples include goodwill impairment testing, business combinations, and complex security valuations). The speakers discussed best practices, which typically start with holding an upfront meeting with all persons of interest – this can help align expectations, discuss methodologies, and define scope. Persons of interest include the company’s management team, the valuation specialist, the auditor (or audit team), and the auditor’s valuation specialist. *Glad to hear that this type of upfront meeting is best practice – this is something we do on all our fair value related projects too!
Discount Rates and Volatility for Contingent Consideration – When valuing contingent consideration arrangements (such as earn-outs or claw-backs) where the payments are based on a specific metric, the fair value analysis should based on an appropriate discount rate and volatility inputs. The analysis should consider a metric-specific discount rate and volatility estimate (that matches what the contingent consideration is based on – such as revenue, gross profit, EBITDA, etc.). There are two methods to consider, the bottom-up method and the top-down method.
The Company-Specific Risk Premium – Appraisal Foundation Working Group Update – The Appraisal Foundation has formed a working group to develop a Valuation for Financial Reporting (VFR) Advisory on the topic of company-specific risk premiums. A valuation brief on this topic was issued earlier this year (July 2023). A company-specific risk premium is often included within discount rates used in fair value measurements. However, there is diversity in practice within the valuation community as to what the premium should account for and how it should be quantified. One great thought that was hit on for this topic – even if your CSRP is 0%, you still need to support it!
Bottom Line
Evergreen Advisors’ team of business valuation professionals attend conferences like this to stay at the forefront on rising issues and best practices in fair value related engagements for financial reporting purposes. Our team provides valuations that are required to support GAAP (“Generally Accepted Accounting Principles”) based financial statements, including purchase price allocations (business combinations), testing for goodwill impairment, investment portfolio valuations, and equity-based compensation.
