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. Some of these concerns included a perceived lack of consistency in the valuation work product, lack of a unified identity of valuation experts, lack of consistent qualifications/experience for valuation credentials, and a lack of consistent enforcement/disciplinary mechanisms for valuation specialists.

Criticism related to fair value is not limited to just the valuation specialist. In a 2015 survey of deficiency findings in audits, nearly 20% of such deficiencies relate to fair value measurements. These deficiencies included cases of failure to sufficiently test source data, failure to assess the reasonableness of assumptions, and lack of consideration of contrary/inconsistent evidence, where available. As previously noted on this blog, the PCAOB continues to be concerned with the auditing of fair value measurements, especially after finding that over 40% of issues it identified were related to accounting for business combinations (ASC 805).

But what about valuation specialists? In 2014, representatives from the American Institute of Certified Public Accountants (AICPA), American Society of Appraisers (ASA), Royal Institution of Chartered Surveyors (RICS), and The Appraisal Foundation (TAF), along with global valuation leaders from several large accounting firms and the International Valuation Standards Council (IVSC), began formal discussions regarding proposed solutions to the concerns expressed by the SEC. In early 2015, a joint statement was issued by AICPA, ASA, and RICS to their members outlining the steps that would be taken to “strengthen the valuation infrastructure in the U.S., particularly in the area for fair value measurements related to business and intangible asset valuations for financial reporting.”

Since that time, these participating valuation professional organizations (VPOs) have been working to develop a new shared professional credential that would demonstrate the competence of business valuation professionals providing valuation services for financial reporting purposes. The VPOs have been working along three major workstreams (performance requirements, qualifications, and quality control). The performance framework is slated to be ready in early 2016 for public consultation. The exact qualifications requirements to attain this credential have yet to be finalized.

It is our understanding that the new fair value credential will be issued under a common framework, but the individual will be bound by the issuing group’s professional and ethics standards (AICPA, ASA, or RICS). The new credential will initially focus on business valuation and intangible asset valuations for financial reporting (ASC 820, ASC 805, ASC 350, and ASC 718). It is expected that a second credential would be developed to focus on fair value measurement for financial instruments.

At Mercer Capital, we have always prioritized and valued the personal development and credentialing of our professionals. We will continue to monitor developments surrounding this new professional credential and believe that it will ultimately benefit our clients and their stakeholders via a higher level of consistency and quality in the work product.

Related Links

• Fair Value: More Problems and Less Disclosure
• New PCAOB Consultation Paper Addresses Fair Value Auditing Standards
• Audit Deficiencies Continue to Cause Headaches
• In the Eye of the Beholder: Increasing SEC Scrutiny of Public Company Fair Value Marks