The Financial Reporting Blog

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

Secrets of the Tech Road: The Evolving Status of Non-Competes

For hundreds of years, various Chinese dynasties prevented the dissemination of their sericultural secrets along the Silk Road by punishment of death. If anyone were caught smuggling a silkworm egg or cocoon or revealing any information about silk production, well, it would be off with their head. While axes have fallen out of fashion as the weapon of choice for protecting intellectual property, some might argue that they have been replaced by the equally controversial non-compete agreements (NCAs). Massachusetts is considering the adoption of policies to all but eliminate employee non-compete agreements (certain sales of a business are one exception), modeled after California legislation where courts have essentially refused to enforce them. While opinions are split, the winds of change may be blowing against covenants not to compete.

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.

Misleading Purchase Accounting Results in SEC Complaint and Fines for CVS

On April 8, 2014, the SEC charged CVS Caremark Corp. with misleading investors by failing to disclose certain financial setbacks and using improper purchase price allocation accounting that artificially boosted its financial performance. The SEC’s actions (and the resulting settlements) remind us that fair value matters often come under heavy scrutiny.

Spotting Young Talent: Belgian Football and VC Investments

Towards the end of 2013, the Belgian football club FC Racing Boxburg awarded 20-month old Bryce Brites a contract. Disbelieving commentary around the signing coalesced around the notion that the evaluation of tender sports talent is completely subjective. Similar incredulity appears to have greeted the valuations implied by transactions involving a couple of (virtually) pre revenue start-up companies.

Early Purchase Price Allocation Estimates Help Avoid EPS Surprises

For public companies, it is increasingly necessary to disclose a preliminary allocation of purchase price in the 10-Q or 10-K immediately following the closing date. Preliminary allocation is important because the accounting for goodwill and intangibles drives future amortization expense which affects earnings per share. The split between amortizable and non-amortizable value can materially impact forward EPS. In addition, nobody likes surprises. A hastily prepared preliminary allocation may underestimate the value of certain intangibles, or worse, fail to initially recognize certain intangible assets that might have been discovered during a more thorough valuation process.

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