On 4/25/2024, the American Society of Appraisers (“ASA”) held its 2024 ASA Spring Fair Value Conference.
Below are a few key takeaways from the conference:
Big 4 Leadership Panel
The event kicked off with a panel discussion from several valuation professionals representing each of the Big 4 accounting firms (Deloitte, EY, KPMG, and PwC), where they discussed several current topics impacting their practices.
- The Return of In-Person Interaction: They touched on the importance of in-person meetings with clients when gathering information on valuation projects and how in-person meetings can be extremely valuable for younger staff members’ development. We agree with this sentiment and find that this approach also helps in building meaningful relationships with clients. In addition, the speakers mentioned that they are seeing their workforce spend 2-3 days in the office but are not anticipating a full 5-day-a-week schedule to ever return.
- Offshoring by Big 4: The Big 4 leaders also discussed cost-lowering initiatives that their practices have adopted in recent years, including i) offshore staff members (offices in India, Philippines, Argentina, etc.) and ii) the increased use of automation (implementing artificial intelligence (“a.i.”), software databases, etc.). The Big 4 have explored using a.i. for report writing, observing industry trends, and selecting guideline public company groups. However, they were quick to qualify this approach with the need that all analysis and data used in valuations needs to be reviewed for reasonableness. These initiatives have diminished the need for lower-level staff members but, at the same time, have increased the need for manager/director-level positions to interpret data. At Evergreen, we use a variety of software databases to help improve efficiency but are still exploring how to best implement a.i. in a controlled manner. Also, we are a U.S. based firm that does not outsource any of its professional services to offshore markets.
- Valuations and Audit Review: Additionally, the speakers provided an update on AICPA’s Draft Business Combination Guide, which is expected to be formally published this summer. Overall, they are only expecting to see slight tweaks to language but no major changes from the initial exposure draft of this guide. They emphasized that following the guidance set forth in this guide will be very important for valuation projects to get through audit reviews. In the future, ASC 360 (impairment of long-lived assets) might be re-visited, as there are a lot of differences in opinion on the interpretation of current guidance/standards within the industry.
Critical Valuation Issues Faced by Alternative Investment Managers
A separate group of valuation speakers stressed the importance of the new Private Fund Advisor Rules, which were adopted on August 23, 2023. These rules require SEC-registered advisers engaged in adviser-led secondary transactions:
- to obtain and distribute either a fairness or valuation opinion
- to provide a summary of any material business relationships between the adviser or its related persons and the independent opinion provider.
In addition, the new rules include a Quarterly Statements Rule, which requires registered investment advisors to distribute quarterly statements to fund investors. These statements must disclose substantial and detailed information about the fund’s investments and performance (for illiquid funds, this includes internal rate of return (“IRR”) data and multiples of invested capital).
For asset investment managers, the newly published rules will significantly increase their administrative requirements and, in certain cases, require the services of an independent third-party provider, like Evergreen, for services such as valuations or fairness opinions.
The compliance date for the new rules will come into effect 18 months after the publication of the Federal Register, on March 14, 2025.
Valuing Performance-Based Incentive Units
Speakers held a discussion on stock-based compensation and the valuation of common award structures (including options, restricted stock, performance & market awards, and liability awards). They discussed the differences in valuation approaches used for market awards, which vest based on stock performance over time, versus approaches used for performance awards, which vest based on operating metrics (typically some version of an earnings metric). They discussed the theory/framework of award and option valuation models (including option pricing models, lattice models, and Monte Carlo simulations).
Bottom Line
Other topics included in the conference related to thoughts on understanding and measuring risk, estimating technological obsolescence, and environmental, social, and governance (“ESG”) impacts on investor returns.
Evergreen Advisors’ team of business valuation professionals works to stay at the forefront of rising issues and best practices in valuation-related engagements. Our team often 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.
About Evergreen Advisors:
Evergreen Advisors is a middle-market investment bank and corporate advisory firm focused on servicing organizations throughout their financial lifecycles to drive successful outcomes. Serving the Mid-Atlantic region, including Maryland, Washington D.C., Virginia, and Pennsylvania, Evergreen Advisors, LLC was formed in 2001 to provide innovative and strategic solutions to meet our client’s evolving business need
