A New Framework and Credential for Financial Instrument Valuation

Global accounting standards increasingly call for financial measurements and disclosures that comply with a defined measurement objective, such as fair value.  Additionally, financial instruments are becoming increasingly complex in their terms, conditions, and structure.  As a result, the AICPA has announced the creation of a new Disclosure Framework for the Valuation of Financial Instruments (the “DF-FI”) and a new professional credential relating to financial instruments called the CVFI (Certified in Valuation of Financial Instruments).

$475 Million Bargain Purchase Leads to an SEC Settlement

Was it a bargain purchase or not? The SEC has reached a $6.2 million settlement with a Big 4 audit firm relating to auditing failures associated with Miller Energy Resources, an oil and gas company with activities in the Appalachian region of Tennessee and in Alaska. In late 2009, Miller acquired certain Alaskan oil and gas interests for an amount the company estimated at $4.5 million. The company subsequently assigned a value of $480 million to the acquired assets, resulting in a one-time after-tax bargain purchase gain of $277 million. Following the deal, the newly acquired assets comprised more than 95% of Miller’s total reported assets. This post will examine the particulars of the case and provide some observations on fair value accounting that can be gleaned from the SEC settlement order.

Q&A:  New Guidance on Valuation of Contingent Consideration (Earnouts)

Contingent considerations (earnouts) are agreements between the parties to a corporate transaction to defer a portion of the purchase price. Techniques for measuring fair value have evolved over time. The exposure draft advocates wider application of options-based methods. The guidance is an important step in advancing the valuation profession. The SEC and others have lamented the diversity of practice among practitioners, and the exposure draft addresses that concern in a constructive manner. The detailed discussions and examples should promote broad and consistent adoption of techniques that have to-date been applied only sporadically and inconsistently. Techniques advocated in the exposure draft should promote the “auditability” of very tricky and subjective fair value measurements.

5 Things to Know about Fair Value and Equity Investments

The rules are changing for how companies report their investments in other businesses. As highlighted in a recent article in the New York Times, new rules from the FASB regarding how entities will have to measure certain equity investments (for example, Google’s equity holdings in Uber) may lead to increased earnings volatility and additional fair value complexities. Here are five things to know about the “new” rules and a few questions to consider as the implementation dates approach.

Mercer Capital Supports New Valuation Credential

Mercer Capital supports the new credential for valuation professionals whose practices are dedicated to valuing businesses and intangible assets for U.S. public companies. The CEIV™—Certified in Entity and Intangible Valuations™—is now available to current or prospective members of the American Society of Appraisers (ASA), the American Institute of CPAs (AICPA), or the Royal Institute of Chartered Surveyors (RICS).

Distribution Policy in 30 Minutes

Of the three primary corporate finance decisions, distribution policy is the most transparent to shareholders. The purpose of this whitepaper is to help directors formulate and communicate a distribution policy that contributes to shareholder wealth and satisfaction.

Capital Structure in 30 Minutes

Capital structure decisions have long-term consequences for shareholders. The purpose of this whitepaper is to equip directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company.

Financial Reporting Blog: Best of 2016

2016 proved to be an interesting year, both in terms of developments in financial reporting and the range of topics covered on this blog. We’ve enjoyed sharing our thoughts in this forum over the last three years and look forward to new challenges and opportunities in 2017.

Guest Post: Solving the Conundrum Presented by Non-GAAP Financial Measures

Vincent Papa, PhD, CPA, CFA is Interim Head, Financial Reporting Policy at CFA Institute. He recently co-authored a two-part report on a comprehensive CFA Institute-member survey on non-GAAP financial measures. The views and opinions expressed in this post are those of the author and do not necessarily represent the views of Mercer Capital.

Market Participant Perspectives

We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.

PCAOB to Focus on M&A and Fair Value in 2016

In July 2016, the PCAOB issued a staff inspection brief to provide information about the plan, scope and objectives of PCAOB inspections in 2016 of registered audit firms and their audits of issuers. Translation: watch out for these potential landmines when preparing, auditing, or reviewing your firm’s financial statements.

Five Variations on a Theme: Analyzing Transaction Premium Data (Part 2)

Part 1 of this series offered an overview of observed transaction premium data (from the 2016 Mergerstat Review) for acquisitions of public companies. That post also deliberated on one of five common avenues to incremental economic benefits that motivate market participants to transact. Part 2 walks through the four remaining variations on the incremental economic benefits theme, and offers some concluding thoughts on how to incorporate this sort of analysis into fair value measurements.

Five Variations on a Theme: Analyzing Transaction Premium Data (Part 1)

The consistent theme of the Appraisal Foundation’s exposure draft The Measurement and Application of Market Participant Acquisition Premiums is that acquirers do not value control for its own sake, but rather for the tangible economic benefits that can be achieved by the exercise of control. In other words, control of a business enterprise is valuable only to the extent that at least one of two conditions prevail: (1) the control buyer anticipates that the business will generate incremental cash flows under their stewardship, and (2) the control buyer has access to less expensive capital than the current owners.

Appraisal Foundation Releases Final Guidance on Fair Value Measurement of Customer-Related Assets

On June 15, 2016, the Appraisal Practice Board (“APB”) of the Appraisal Foundation released the final version of the Valuation for Financial Reporting Advisory #2, The Valuation of Customer-Related Assets. The non-authoritative best practices guidance elaborates on valuation approaches and methodologies that can be used to measure fair value of customer-related intangible assets such as customer lists, order or production backlogs, and contractual and/or non-contractual customer relationships. This post briefly discusses this document.

Non-GAAP Measures: Here to Stay?

The debate over the use of non-GAAP performance measures continues. Even as the prevalence of these items grows in the financial reports of public companies (and those that want to be), cautionary tales of the uses and abuses of such metrics garner headlines. A recent New York Times piece entitled “Fantasy Math Is Helping Companies Spin Losses Into Profits” pretty much sums up one side of the issue with its headline alone.

7 Things to Know About the New Lease Accounting Rules

More than ten years in the making, the FASB announced sweeping changes to the accounting for leases earlier this year that will affect nearly all financial statement issuers. Here’s a brief summary of what you need to know about Topic 842.

Our Economy Has Changed. Should Our Accounting Standards?

Companies are allocating more money to developing nonphysical assets such as databases and brands than to building physical assets, such as new factories. With the rise of technology and professional service firms, which generate ideas and provide knowledge-based services, rather than physical assets, the U.S. marketplace is shifting from one which supplies goods to one which supplies ideas. The U.S. generates a large share of wealth from intangible assets such as patents, copyrights, and business processes. This store of value is essentially invisible to investors because internally generated intangible assets are not reported on the balance sheet. There is a growing gap in the balance sheet reflecting this shift from physical assets to intangible ideas and the Financial Accounting Standards Board (FASB) is considering adding the topic to its rule making agenda.

Higher Standards for Fair Value

Over the last several years, various officials at the SEC have expressed concern about the broadening application of fair value measurement and its impact on the reliability and consistency of valuations performed for U.S. public companies. How is the valuation community responding?

Non-Compete Agreements: The Good, the Bad, and the Ugly

Non-compete agreements are increasingly in the news, though not always in the most favorable of contexts. Proponents argue that such agreements protect firms’ intellectual property and prevent the loss of key employees, customers, suppliers, and trade secrets. Others would suggest that non-competes stifle innovation by limiting competition and employee mobility. In this post, we consider recent examples of non-compete agreements and how they impact value.

Business or Asset: Can You Tell the Difference?

The Financial Accounting Standards Board’s (FASB) definition of a business is important when it comes to classifying assets and related expenses. However, some feel that the FASB’s current definition is ambiguous and can result in inconsistent designations of business or asset status. In this post, we discuss the FASB’s proposed standards update, clarifying the assets versus business debate.

Valuation of Customer-Related Assets

Customer relationships form a key intangible asset for firms operating in many industries. Firms devote significant human and financial resources in developing, maintaining and upgrading customer relationships. In some instances, supply or customer contracts give rise to identifiable intangible assets. More broadly, however, customer related intangible assets consist of the information gleaned from repeat transactions, with or without underlying contracts. Firms can and do lease, sell, buy or otherwise trade such information, which are generally organized as customer lists.

The Appraisal Practices Board of The Appraisal Foundation originally released a discussion draft of a document entitled “The Valuation of Customer-Related Assets” in June 2012. The draft, authored by the Working Group on Customer-Related Assets, provides best practices guidance on the valuation of customer-related intangible assets. A subsequent exposure draft was released in December 2013. A final version of the document is pending. This article, drawing in part from these documents, examines attributes of customer-related intangible assets and their valuation.

Financial Reporting Blog: Best of 2015

With the New Year just around the corner, we begin our countdown a little early. Here are this year’s 10 most popular posts from The Financial Reporting Blog.

Single-Serve Control Premium?

One of the perennial controversies in business valuation is the estimation of so-called control premiums. Following the closing of the comment period on the Appraisal Foundation’s white paper on the topic, control premiums were back in the news last week with announced acquisition of Keurig Green Mountain by JAB Holdings. The transaction’s $92 per share purchase price rewarded investors with a 78% premium to the previous closing price. Compared to the often-cited range of benchmark control premiums between 30% and 40%, the JAB offer is an outlier. As such, what can we learn about control premiums by examining the proposed Keurig transaction a bit more closely?