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Fair Value

Credit Spread Blues & Portfolio Valuation Marks

After being bloodied by widening spreads in the second half of 2014, any hopes that credit investors may have cherished for relief in 2015 remain unfulfilled through the end of January. Time will tell whether wider spreads are here to stay, or if fund flows to high-yield credit and leveraged loan funds will turn positive again, increasing the supply of capital to borrowers. In the meantime, managers responsible for setting fair value marks will need to carefully consider how best to take account of current market conditions.

Box (Finally) Goes Public: Which Price is Right?

Box, a cloud-based enterprise, began trading publicly today after delaying the process last year. Since then, the company was valued at nearly $730 million less than that implied by the Series F round just six months prior.

Non-GAAP Measures are Gaining Popularity in IPOs

Non-GAAP performance measures are becoming more and more popular, particularly for companies looking to raise capital in an IPO. Although financial statements prepared in accordance with GAAP provide the public a standardized basis for historical and comparable financial statements, the use of non-GAAP measures, such as adjusted EBITDA or adjusted gross profit, can allow management to emphasize alternative measures.

FASB Releases Another Elective Exception to GAAP for Private Companies

Just before Christmas 2014, FASB issued Accounting Standards Update No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination, a consensus of the Private Company Council (“ASU”). The ASU allows a private company (i.e. not a public or not-for-profit entity) to choose not to recognize two types of intangible assets separately from goodwill following a business combination: customer-related intangible assets that cannot be sold or licensed independently from other assets of a business, noncompetition agreements.

Top 7 Audit Risks for Year-End

As 2014 draws to a close, finance executives and auditors are preparing for year-end reporting and auditing. What areas will draw the most attention from auditors? And which types of transactions and estimates will attract additional scrutiny from the PCAOB? … Continued

PCAOB Reviews Feedback from Comment Letters

As we noted a few weeks ago, the PCAOB recently issued a staff consultation paper entitled Auditing Accounting Estimates and Fair Value Measurements. As discussed in this article from Compliance Week associate chief auditor of the PCAOB Barbara Vanich recently … Continued

Making Forecasts? Dig a Little Deeper.

Mercer Capital’s own Travis Harms tag-teamed with Ron DiMattia (Corporate Value Partners) on a presentation entitled “Digging Deeper: Exploring the Nuances of Discounted Cash Flow Analysis.” In the presentation, Ron and Travis addressed the importance of conforming the projection model with the subject company’s “story,” integrating the various inputs and assumptions, and testing sensitivities. The session also addressed some of the most-common biases that afflict financial forecasts.

Non-Compete Agreements at a Sandwich Chain?

If you are a top company executive, salesperson, or are employed in a highly skilled technical field, you likely have a clause in your employment contract that prohibits you from leaving to work for a competitor or starting your own firm for a specified period of time. While commonplace for more senior positions and in certain industries, you may be surprised to find a non-compete agreement (NCA) in your contract if you assemble or deliver sandwiches at one of Jimmy John’s 2,000 restaurant locations.

New PCAOB Consultation Paper Addresses Fair Value Auditing Standards

On August 19, 2014, the PCAOB issued a staff consultation paper on standards for auditing accounting estimates and fair value measurements. The paper is part of the PCAOB’s ongoing efforts to evaluate whether existing audit standards could be improved. The staff’s concern is partly driven the fact that many PCAOB inspections have resulted in deficiency findings, particularly in the area of fair value accounting.

Get with the Times: The Fair Value of “Big Data”

A recent WSJ article indicates that transaction-crossing platforms like traditional brick-and-mortar stores or online markets can and do collect data that consumer-product manufacturers are willing to purchase in order to fine-tune their own products and marketing. Financial statements need to reflect current economic realities to stay relevant. Tangible physical assets may have been the primary source of value creation in an earlier era, but intangible assets increasingly drive the business models of a newer generation of firms.

What’s the Control Premium?

Many financial managers, CFOs, analysts, and valuation specialists are familiar with the concept of a “control premium” or “premium paid” that is often observed when a public company is acquired. A control premium is most often measured with reference to the price paid to acquire the company and its trading price immediately prior to acquisition (or rumor of an acquisition). However, the observed premium may not represent a premium for conceptual control inasmuch as it conveys the quantification of actual changes that can be made by exercising that control.

Are Accounting Standards Becoming Less Complicated?

Recently I found myself doing a double-take upon seeing the headline “FASB Looks to Uncomplicated Accounting—A Little, At Least.” Accounting standards becoming… less complicated? In response to various stakeholders’ concerns, the FASB launched an initiative to reduce complexity in accounting standards in July 2014. The FASB’s initiative comes at an opportune time, as accounting standards have become more lengthy and complex, so has the cost and difficulty of financial reporting. The objective of the simplification project is to improve the usefulness and transparency of financial information.

Rest and Vest

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.

Premature Obituaries and Other Mixed Signals

Accounting observers following the long and winding road to convergence of FASB and IASB accounting standards will be forgiven for experiencing a similar degree of cognitive dissonance in recent weeks. Given the glacial pace of accounting standards setting, inaction on the part of the SEC with regard to accepting IFRS-based financials from U.S. filers, and the struggles to find common ground on key accounting issues such as impairment of financial instruments, it had become clear to most that convergence would be neither easy nor quick.

A Game of Names: Licensing and Tradename Valuation

Reaching average audiences of 18.4 million per episode, “Game of Thrones” is the most successful show in HBO’s history. The show’s vast popularity has boosted HBO’s licensing revenue and HBO holds more than sixty different licenses, including for brands of beer, jewelry, and cosmetics. HBO has also made moves to protect the integrity of its licensed products, sending cease-and-desist letters to manufacturers of unlicensed products. The success of both the show and HBO’s ability to capitalize on licensing opportunities leads to interesting observations about the techniques used to value tradenames and licensing rights, both valuable forms of intellectual property.

What Is a B Corp?

S Corp and C Corp are familiar enough designations for businesses, but what about a B Corp? B Corps are a relatively new concept and only time will tell what risks and benefits they will ultimately confer to investors. For the time being, however, they offer business owners an alternative perspective on raising capital and offer investors opportunities to invest in companies that may otherwise not have considered it. Read this post to understand what they are.

Valuation Best Practices for Venture Capital Funds

The National Venture Capital Association (NVCA) published the 2014 Venture Capital Yearbook in May 2014. This blog post summarizes Appendix I of the 2014 Yearbook, which includes comments on valuation guidelines and best practices for venture capital investments and funds.

SEC Signals Increased Focus on Financial Reporting

A recent post on the Wall Street Journal’s CFO Journal blog reported recent comments by Andrew Ceresny, head of enforcement at the SEC, signaling that financial reporting issues will be the subject of enhanced scrutiny as actions related to the financial crisis recede. In testimony before Congress this spring, SEC Chair Mary Jo White cited efforts by the newly-formed Financial Reporting and Audit Task Force to “identify areas susceptible to fraudulent financial reporting through an on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and the use of technology-based tools.” Through Operation Broken Gate, the task force is focused on audit failures in addition to issuer fraud. The emphasis on valuation issues is not surprising, since the exercise of judgment is an inherent aspect of valuation.

Economics of Elon Musk’s Patent Altruism

Elon Musk just opened Tesla Motors’ patents to the public in “the spirit of the open source movement.” Perhaps shrewdly, he appears to have concluded that the cash flows he is giving up today in the form of foregone royalties or potentially lower margins will be more than made up by future cash flows from a more vibrant solar power-based transportation network.

Market Participant Perspectives: An Inside Look at the YouTube Seed Round

A recent issue of Fortune’s daily Term Sheet included a link to a copy of documents relating to YouTube’s 2005 seed round fundraising. The documents, attached to a 2010 court filing, include the presentation made by YouTube’s founders to potential investors and an internal investment memorandum from Roelof Botha, partner at Sequoia Capital, outlining the rationale for an investment in the Company.

The documents provide a fascinating peek behind the curtain, demonstrating what actual market participants care about (and don’t care about) when evaluating early-stage companies. For valuation specialists preparing fair value measurements of early-stage companies, the documents are great reminders of the key elements of start-up valuation.

Audit Deficiencies Continue to Cause Headaches

A survey conducted by the International Forum of Independent Audit Regulators (IFIAR) found that many audits still have significant areas of deficiency, primarily relating to fair value measurement, internal controls testing, and disclosure adequacy. IFIAR members inspected audits at public companies and large financial institutions using the six largest accounting firms (including the Big Four). In many cases, the inspections indicated that the audit firm did not gather enough evidence to support its audit opinion. Among the public companies reviewed, the leading area of deficiency was fair value measurement, which arose in 17% of cases.

Growing Business Development Company Field Highlights Fair Value Requirements for Investment Funds

A recent article on SNL Financial highlights the potential for an “explosion” in the number of publicly traded business development companies, or BDCs, if Congress loosens leverage restrictions historically in place. Business development companies have been a growing source of investment capital for middle market companies and dividends for yield-hungry investors. Congress is currently debating an easing of the leverage limits to 2:1, which would allow BDCs to either maintain dividend yields for investors while taking less credit risk, or increase dividend payouts with the same amount of credit risk. As a result, the contemplated changes increase the attractiveness of the BDC structure, and, if enacted, are expected to precipitate an increasing flow of new public and follow-on offerings.

IVSC Issues Exposure Draft on Bases of Value

The IVSC recently released an exposure draft discussing how the three principal bases of value interact. The IVSC is in the process of evaluating international valuation procedures and guidelines and improving the consistency and clarity of valuation procedures. The IVSC recognizes three bases of value – market, investment, and fair value – but the relative value of each base depends on the circumstances of the transaction. Choosing the appropriate base of value is essential to developing a robust and defensible conclusion.