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.
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.
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.
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 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.
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.
A purchase price allocation report should be well documented, concise, and provide sufficient background information. This post enumerates elements of a properly prepared purchase price allocation report.
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.
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.
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?
The International Private Equity and Venture Capital Valuation (IPEV) Guidelines were developed in 2005 to set out recommendations on best practices in the valuation of private equity investments. The IPEV Board is made up of leading industry associations from around the world, including the National Venture Capital Association (NVCA) and the Private Equity Growth Capital Council (PEGCC) in the United States. In October 2015, the IPEV Board published draft amendments to the existing guidelines that, if approved, will go into effect at the beginning of 2016.
In an article published in August 2015, NERA Economic Consulting examined some of the effects of the SEC’s increasing use of quantitative analysis to identify potential problematic valuations in public company filings. Although the SEC previously used its tools in the private fund advisor sphere, the agency is beginning to turn its gaze to publicly traded companies. Thus far, the SEC’s focus has been on two main points, valuation policies that differ from actual valuation practices (including valuation methods and approaches, as well as the inputs used) and the incorporation of market conditions (or lack thereof).
Back in 2010, Diamond Foods, Inc. completed its acquisition of Kettle Foods, a premium potato chip manufacturer. Diamond paid approximately $616 million for Kettle Foods and $235 million, or nearly 40%, of the purchase price was allocated to “brand intangibles”. Such a high value leads to the question: How are such valuations determined and what are the drivers?
With the second quarter drawing to a close, private equity managers can look forward to a fresh round of portfolio valuation marks. We recently pulled some historical gains and losses reported by publicly-traded BDCs to help provide some context as we look to the upcoming valuation marks.
The CFA Institute recently released a report about investor apprehensions concerning separate accounting standards for private companies. The report reflects the results of a survey of investment professionals in the CFA Institute. The separate accounting standards include differing accounting rules for SMEs (small or medium sized entities) under IFRS and for private companies under GAAP (as advanced by the Private Company Council). On balance, while investors seem to think the initiative will reduce companies’ compliance costs, they believe the benefits are unlikely to outweigh the costs.
I once heard a friend in the investment management business quip in 2006 that value stocks were no value and growth stocks were not growing. Depending upon the sector, the thought may apply today; I think it applies to most banks. Commercial banking usually is a slow- to moderate-growth proposition — if not a boring one except when industrywide credit issues develop. However, what many investors crave is growth, not value. After attending the Gulf South Bank Conference, a number of things caught my attention as it relates to growth and M&A accounting.
Estimating the fair value of stock-based compensation and accounting for it properly can be complex. This post discusses the “rest and vest” scenario through the lens of the HBO program, Silicon Valley.
The online marketplace Etsy is planning an initial public offering which could raise more than $300 million. It’s also a “Certified B Corporation” which means that in addition to focusing on building shareholder value, the company must maintain certain standards of social and environmental performance, accountability, and transparency. From a valuation perspective, what does this mean?
Companies often use contingent consideration when structuring M&A transactions to bridge differing perceptions of value between a buyer and seller, to share risk related to uncertainty of future events, to create an incentive for sellers who will remain active in the business post-acquisition, and other reasons. ASC 805 stipulates that acquiring entities are required to record the fair value of earn-outs and other contingent payments as part of the total purchase price at the acquisition date.
If valuation were an Olympic sport, fund managers and valuation specialists would expect to lose some points for the low “degree of difficulty” in their exercises over the past couple years. Buoyant equity markets, broad credit availability, historically low fixed income yields, and benign credit experience each contributed to ideal valuation conditions for private equity managers in 2013 and 2014. A reversal – or even slowing – of this trend would likely increase the scrutiny on fair value measurement for fund managers. In short, portfolio valuation marks are likely to get trickier in 2015.
Fair value measurements have been a hot topic for many years due to the judgmental nature of the estimation process. Despite ongoing improvement efforts by standards setters, regulators, and valuation specialists, deficiency findings in audits continue to proliferate. In March 2015, a survey conducted by the International Forum of Independent Audit Regulators (IFIAR) found that nearly half of global audits contained a deficiency. Of those deficiencies, 20% centered on fair value measurements.
About a year ago, we discussed Facebook’s impending purchase of messaging service WhatsApp. At the time, the acquisition was the subject of much debate, but the intervening period gives us a chance to see how things have shaken out. This also gives us the chance to see how the purchase price has been allocated for accounting purposes.
In a prior blog post, we noted a plethora of pricing indications observed around Box, Inc.’s (NYSE: BOX) initial public offering and asked the question, “Which price is right?” The prices (and implied valuations) that a business venture can obtain in future funding rounds, and in the public markets, are important considerations from the perspective of VCs and other investors. Unlike most mature public companies, however, startups have a predilection for complex capital structures, which introduces a degree of opacity that makes simple inference from headline numbers (however correct, however precise) difficult. A future funding round or exit event can result in varying outcomes for the multiple classes of securities with dissimilar rights and protections. This blog post will focus on the impact of (relatively steep) pre-public pricing on equity granted as employee compensation, usually the junior-most security in a startup capital stack.
Although successful bank acquisitions largely hinge on deal execution and realizing expense synergies, properly assessing and pricing credit represents a primary deal risk. Additionally, the acquirer’s pro forma capital ratios are always important, but even more so in a heightened bank regulatory environment and merger approval process. Against this backdrop, merger-related accounting issues for bank acquirers have become increasingly important in recent years and the most significant fair value mark typically relates to the determination of the fair value of the loan portfolio. Fair value is guided by ASC 820 and defines value as the price received/paid by market participants in orderly transactions. It is a process that involves a number of assumptions about market conditions, loan portfolio segment cash flows inclusive of assumptions related to expected credit losses, appropriate discount rates, and the like. To properly evaluate a target’s loan portfolio, the portfolio should be evaluated on its own merits, but markets do provide perspective on where the cycle is and how this compares to historical levels.
Against the backdrop of depreciation, as with Prospect Capital Corp. and Fifth Street Finance Corp., heightened investor scrutiny may be on the horizon for BDCs dealing with issues like fair value marks and lower yields. Companies can increase leverage to offset lower yields, but there is a limit to how much leverage BDCs can employ and what investors and rating agencies will accept. High payout ratio companies like BDCs are susceptible to dividend cuts. Lower payout ratio entities such as commercial banks are not as long as credit quality is okay, but future dividend hikes may be much more limited than envisioned by investors for the same reason.