Accounting rule makers have taken a major stride toward mandating fair market value as the yardstick for valuing assets changing hands in a deal. In a statement issued in mid-September, the FASB in effect locked in fair market value – basically the price for which business assets can be bought and sold in a marketplace – as the universal measure of assets. Valuation pros expect the second shoe to drop when the board plugs fair market values into the rules for allocating the purchase price to acquired assets following an M&A deal. The new standard, embodied in the board’s SFAS 157, did not surprise valuation specialists, many of whom already have been working with fair market value approaches, and they welcomed it as providing important guidance in shaping their calculations. But they said a number of assets lack established trading markets and will be hard to value on that basis, although they expected that reasonable and accepted practices in those sectors will evolve over time. P.J. Patel, a Senior Vice President at Valuation Research, calls 157 a “useful tool” because it provides guidance in an area where approaches differ. “Everyone’s not on the same page yet, and 157 is aimed at getting everyone on the same page, whether it’s the auditor, the company using the fair value measurements, or the valuation experts.” Although the across-the-board reach of fair market value doesn’t kick in until Nov. 15, 2007, buyers already are getting the message on its M&A implications, says Neil Beaton, National Valuation Partner at Grant Thornton. “Companies are coming to us before the acquisition and asking us how the purchase price is to be allocated,” he says. “How is that going to impact my tax exposure? How is this going to impact the way I write off the assets I have to write off over a specified period of time? Even now it’s impacting the M&A market in the way that it’s going to be treated.” Among the key elements in the new standard are a definition of fair market value as the price that could be received for selling an asset or transferring a liability and zeroing in on fair values from the perspective of a “market participant,” which some experts say may need to be defined more precisely. Another key point is that brands and other assets that a company or a buyer wants to drop, which historically have been ignored, will have to be valued – the statement refers to them as “defensive values” – based on what somebody else might pay for them. In a parallel move, the FASB issued a proposal for fair market values in M&A accounting, which helps determine post-deal asset revaluations, depreciation schedules, acquisition goodwill, cash flow, and, ultimately, earnings of the combined company. Stamos Nicholas, a Principal in the valuation practice at Deloitte Financial Advisory Services, says that the intent of SFAS 157 is to come up with “real values” generally and in the M&A context when assets have to be broken down. “This guidance is supposed to help you develop good numbers, and the auditors want to get comfortable with them because they have to sign off on them.” Despite the improved precision, valuation experts note that there still will be a lot of trial and error in valuing assets that, unlike machinery, buildings, and many intangibles such as licenses and patents, don’t have trading markets. Customer relationships and other customer-linked assets are among the most problematic. John Glynn, who runs the Transaction Services Accounting and Valuation Advisory Practice at PricewaterhouseCoopers, says that valuation often is a “highly judgmental area” and is especially challenging when there are “no markets or deals to benchmark against.” “The whole area of intangibles is a front-burner issue,” he adds. But the experts say that their goal is to come up with figures that are “reasonable” regardless of the asset and the ground rules. Park Johnson of Hilco Appraisal Services says, “There’s a tremendous amount of judgment applied in all of these, and it’s sometimes hard to find exact comparables.” (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

To read the entire story, you must be logged in.
Please log in now or register with us.
Register

How useful was this post?

Tell us more about your rating decision