The Financial Reporting Blog

A weekly update on financial reporting topics curated by Mercer Capital’s Financial Reporting Valuation professionals.

Crowded Out?

In October 2015, the SEC adopted final rules governing the crowdfunding of startups and Regulation Crowdfunding was issued in May 2016. Subsequently, the SEC has issued investor bulletin(s) to educate potential investors on the new investing opportunities. The new rules allow non-accredited investors to invest directly in startup (and other) companies that can raise up to $1 million every twelve months through crowdfunding. At the time the SEC first proposed the rules in October 2013, we speculated that crowdfunding might turn into a new source of capital for small businesses. Now, a year after Regulation Crowdfunding came into effect, we take a look at the state of crowdfunding.

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.

If It Was Easy, We’d All Be Rich

A couple of articles in the Wall Street Journal last week highlighted challenges of managing and investing in early-stage companies. From a valuation standpoint, the articles are timely reminders of the importance of cash burn rates, dilution factors, and exit probabilities in measuring the fair value of startups.

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