Changes Coming to Corporate Venture Capital Investment Reporting

Accounting Standards Update 2016-01 has generally flown under the radar since it was released almost two years ago.  However, this accounting update has the potential to significantly affect financial reporting by public and private companies with minority equity investments – including corporate entities with a portfolio of venture capital investments.

Barron’s Goes Unicorn Hunting

In Barron’s November 20 cover story, “The Trouble with Unicorns,” Alex Eule discusses some of the finer points of venture-stage valuation that are often overlooked in the press.

Early Purchase Price Allocation Estimates Help Avoid EPS Surprises

While ASC 805 permits companies up to one year to finalize and true-up the allocation, it is often the case that a preliminary allocation disclosure includes a full list of identified intangible assets, estimated fair values, and useful lives. Why is this preliminary allocation important?

SEC Approves New PCAOB Audit Standards

On June 1, 2017 the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard to provide additional information to investors.  The new standard received approval from the Securities and Exchange Commission on October 23, 2017.  This post summarizes several of the major changes coming to audit reports in the near future.

PCAOB Inspection Scrutiny of Fair Value Measurement Continues

Fair value measurement has been a hot topic during the last few years, increasingly attributable to PCAOB identified audit deficiencies and heightening scrutiny over the existing fair value framework and related auditing standards.  In this post, we take a look at the causes of attention and recent responses from professionals and professional organizations.

New Market Evidence Confirms Control Premium Best Practices

The Appraisal Foundation’s forthcoming VFR Valuation Advisory #3, The Measurement and Application of Market Participant Acquisition Premiums (“Advisory #3”) suggests that control of a business enterprise has limited value for its own sake. Rather, the value of control is correlated to the expectation for enhanced economic benefits from exercising such control. Recently published research from McKinsey & Company confirms this insight, finding that investors view acquisitions more favorably when specific synergies are identified and quantified at the announcement date.

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.