Travis W. Harms, CFA, CPA/ABV, senior vice president of Mercer Capital, spoke recently with Compliance Week on The Appraisal Foundation’s exposure draft on how to value contingent consideration as part of business transactions.
In their piece, Valuation group proposes rules for contingent consideration, Travis is quoted saying:
The proposed guidance advocates a risk-neutral framework based on option pricing, says Travis Harms, head of the financial reporting valuation group at Mercer Capital. “It means the best way to value an earnout is by analogizing to a call option or some combination of call options that do the same thing, and then using the valuation methods developed over the last 50 years to value the call option to in turn value earnouts,” he says.
The Appraisal Foundation proposal is geared toward trying to assure contingent consideration is valued consistently across transactions to improve consistency and comparability across capital markets. It seeks to steer valuations away from imprecise “scenarios-based approaches,” Harms said, which amount to educated guesswork. “The thought behind the new guidance is it will provide a more reliable, more consistent, more auditable measure of fair value,” he said.
In addition to leading the firm’s Financial Reporting Valuation Group, Travis is head of Mercer Capital’s Private Equity industry team and publishes a quarterly newsletter, Portfolio Valuation: Private Equity Marks & Trends. He also contributes regularly to Mercer Capital’s Financial Reporting Blog. Travis is a member of The Appraisal Foundation’s working group to address best practices for control premiums. Travis is a frequent speaker on fair value accounting topics to audiences of financial executives, auditors, and valuation specialists at professional conferences and other events across the U.S.
To read an in-house interview with Travis on The Appraisal Foundation’s exposure draft of Valuation of Contingent Consideration, click here.