Commentary on the Launch of the ICVS-A Credential
January 2020


Hi everyone,

I am so, so pleased to annouce the successful launch of the ICVS-A (International Certified Valuation Specialist- Advanced Studies in Financial Instruments) credential.  The training program which was conducted in Orlando received superlative reviews from the IACVS leadership.  The three day training program covered all the pertient materials needed to take the two-part examination.  The exam will have both multiple choice questions and a major case study. There are plenty of materials for the examination.  In addition to the manual and the various sources cited, there is also two different video recordings.  One was from the live training session and the other from a recording studio. 

The training program will be offered via live training, hybrid training, and fully on-line.  Students will have two options for test taking based on their backgrounds.  For valuators who already possess the ICVS, they will only be tested on the advanced materials on financial instruments. For parties who do not have the basic ICVS, can choose to simply take a combined exam which covers both the basic and advanced portions.  They will also be required to take the case study as well.

This credential is surely needed in this complex financial society in which we all live in.  Having this designation will demonstrate to potential clients (be it individual or corporate), government officials, and the academy that they have the necessary skills to handle all complext type valuations.

In closing, these are exciting times for both IACVS and the Center. Wishing us all financial prosperity and health for the upcoming new year.  Until next time........


The Launch is Here!
December 2019

Hi everyone,

The ICVS-A (International Certified Valuation Specialist- Advanced Studies in Financial Instruments) credential  has arrived! The training program will commence during mid-December in Orlando, Florida at the Omni Resort. We have approximately 20 qualified individuals signed up for this live training event.  This program which will also be offered via on-line training will establish the standards needed to perform valuations of derivative products.  Further, the much needed training in computer programming will also be part of the curriculum.

As my previous blogs discussed, there is a dire need for training in this field. We hope that this credential can establish some uniformity and quality valuations in what I call the "Wild West" area of business valuation.

In closing, I wish you all a very happy and healthy holiday season and until next time........


Are IPOs overvalued?
November 2019

Hi everyone,

Hope the month of November is treating you all great.  In this month's blog, I will be going over a report from Pitchbook (the leading database for Private Equity investors) which suggested that IPOs are not doing so great. The once mighty unicorns are not performing as expected.  Yet, their astronomical values, or should I dare say pricing, for organizations that have not been profitable from the onset should raise eyebrows.  Unfortunately, people tend to have short memories in that they have forgotten the "" bust in late 1990s.  Many of the similarities which occurred back then are not too different than the situation today with these leading IPOs. In the article by Kevin Dowd, "Ex-unicorn stocks are tanking in a post-WeWork world" suggested that many of the brand names are not doing well with their performances.  With the exception of Beyond Meat which is generally an outlier in all metrics, companies such as Smartsheet, Anaplan, Avalara, Tufin and Dropbox have their stock prices drop considerably. Let’s not also forget, Peloton and SmileDirectClub, who went public in September, have already experienced double-digit declines in their share prices. This all brings up back to valuation.  What we are really seeing is a bubble without any foundation for such value. The pundits would argue Intangibles but that can only go so far.  Let’s go back to the fundamentals.  If you aren’t profitable, investors should not invest until they turn it around. 

Until next time……………………………………


ICVS-A Gains Recognition by BVR
October 2019

Hi all,

The launching of the ICVS- A (The Advanced Studies in Financial Instruments) is around the corner.  Without having to elaborate, let the article speak for itself.  Until next time.....




The International Association of Certified Valuation Specialists, in conjunction with the Center for International Business Valuation, has added an advanced level to the International Certified Valuation Specialist (ICVS) credential. Valuators can now earn the ICVS with Advanced Studies in Financial Instruments (ICVS-A). The ICVS-A designation can be earned along with the initial ICVS or can be added to enhance a current ICVS credential. The ICVS-A designation requires an understanding of valuation techniques for various financial instruments, ranging from basic securities to complex derivative constructs. The inaugural live training, presented with the Southeast Chapter of Business Appraisers, will be held in Orlando, Fla., on December 16, December 17, and December 18. Business valuators with a credential such as the ICVS, ASA, ABV, CICBV, BCA, or CVA are welcome to attend. Upon completion of the training program, students can participate in the ICVS-A credentialing exam. For more information, there’s an ICVS-A brochure; to register for the training, click here.

PCAOB Staff Guidance- Part 2
September 2019

Hi everyone,

As always, hope all is going great. I will continue where we left off regarding the new PCAOB’s staff guidance on the auditing the fair value of financial instruments. This second portion of the blog is dealing with “pricing services.”  According to PCOAB’s Auditing Standard (AS) 2501 (Revised), defined pricing services as “organizations that routinely provide uniform pricing information to users, generally on a subscription basis. In general, financial instruments covered by these services tend to be those with more direct or indirect observable inputs (such as municipal bonds and corporate debt).”

The staff guidance also suggested that pricing services are also sometimes hired to specifically value specific financial instruments not routinely priced for their subscribers. When this situation occurs, PCAOB classifies these pricing services as specialists.

PCAOB then addressed how one should assess the reliability of pricing information. They suggested that the reliability of audit evidence depends on the nature and source of the evidence and the circumstances under which it is obtained. The following factors were recommended in determining the reliability of pricing information from a pricing service:

1. Experience and expertise of the pricing service relative to the types of financial instruments being valued,

2. Whether the methodology used by the pricing service in determining fair value of the types of financial instruments being valued is in conformity with the applicable financial reporting framework, and

3. Whether the pricing service has a relationship with the company by which company management has the ability to directly or indirectly control or significantly influence the pricing service.

Lastly, if the pricing service of a financial instrument includes unobservable inputs that are significant to the valuation, the auditor is required to obtain an understanding of how unobservable inputs were determined and to evaluate the reasonableness of those inputs by taking into account.

The point of this blog is twofold.  One, PCAOB did a fine job in elaborating the expectations as to valuing financial instruments.  On the other hand, was it really needed since these are audit steps that should be taken anyways?  At the end of the day, it all comes down to integrity and competence.  We can have all the standards in the world but unless the auditors conduct themselves with integrity, it is all moot.

Until next time………


PCOAB New Auditing Standard on Fair Value of Financial Instruments
August 2019

Hi everyone,

Hope all is going great. This August blog which is one of two parts will address the never-ending saga of new standards for the fair value of financial instruments. In Part 1, I will discuss the Public Company Oversight Accounting Board’s (PCOAB) new auditing standards governing assessment risk. In next month’s blog, I will continue with their new auditing standard but focusing on third-party pricing services. PCOAB issued AS 2501- Auditing Accounting Estimates, Including Fair Value Measurements. The gist of it deals with identifying and assessing risks of material misstatement. In my humble opinion, there is nothing new under the sun with this pronouncement. It is just an amplification of techniques that should have been followed in the first place. With that said, this standard suggested that the auditor identifies and assess risks of material misstatements by:

1)     Reviewing the terms and characteristics of financial instruments

2)     Determining the extent to which the fair value of the type of financial instruments is based on inputs that are observable directly or indirectly.

3)     Comprehending the other factors affecting the valuation of the financial instruments, such as credit or counterparty risk, market risk, and liquidity risk.

As the list abbreviated list suggests, these procedures are nothing special or new. These factors should have always been considered but nevertheless, the PCOAB felt compelled to issue them for purposes of clarity for auditors who are conducting reviews and audits of financial instruments.

The September blog will continue on with a discussion of third-party pricing services which PCOAB has also elaborated upon. Until next time…………………………………………………..


Derivative Valuation
July 2019

Hi everyone,

Hope this blog finds you doing great. A lot going on in the field of valuation of derivatives.  In a recent survey by the AICPA, there is much concern about risks inherent in derivatives and the approaches used to value these constructs. For example, 55 percent majority of the CPA business executives expressed concern about financial instrument valuations and fifty-five percent said they are concerned about the valuation of derivatives with 6 percent reporting significant concern and 49 percent reporting slight or moderate concern. Fifty-six percent said it would be easier to figure the value of complex financial instruments if they were measured and reported on a consistent and transparent basis. 

These are significant findings and just as important, they same survey respondents believe that derivatives are getting even more complex. What is the solution then? Obviously, more training is needed in this discipline.  With this said, the Center for International Business Valuation along with the International Association of Certified Valuation Specialists will be offering a three-day intensive training program (December 16th-18th in Orlando, FL) leading to an advance credential in fair value of financial instruments.  See the below link for details. Hopefully, this is the start of creating a uniform approach in the valuation of these types of instruments.

Until next time……………………


A quick way to calculate fair value of stock
June 2019

Hi everyone,

Hope all is well.  Recently, a very interesting article about an expeditious approach to determine the fair value of stock was published.  I thought about it for a while and said to myself, it is worth summarizing for this month’s blog.  The credit for this blog must therefore go to Chuck Carnevale of Fast Graphs who happens to be a consistent contributor to Seeking Alpha.

The basic premise of his article suggested that shareholders might know the price of the stock but not its worth and since there is no preciseness in calculating stock value, it creates much stress for investors. He presented a fact pattern regarding Citigroup that showed that over the last 20 years, earnings performance ultimately translated into stock value.   At its essence, the fair value of common stock relates to what you are paying to buy a current dollar’s worth of the company’s earnings.  If that is the assumption one is working from, then fair value is simply the current earnings yield that the investor is receiving on their capital. The most common PE ratio that depicts fair value for most companies is 15, which represents a current earnings yield of 6% to 7%. As a result, if you utilize a PE ratio of 15 as a fair value guide for most companies, you can be confident that you are investing in them at a sound valuation.

Mr. Carnevale concluded by suggesting that if a stock is trading at a PE ratio above 15, you can assume that it is overvalued. For example, if a blue-chip stock is going for 16, 17 or 18 times earnings, this would simply mean that your future return will be lower than it would have been had you only paid the PE ratio of 15. This might mean that you will earn a return that is lower than you deserve, but perhaps a return that is earned at lower risk.

Until next time……………………….


PCAOB Study on Fair Value
May 2019

Hi everyone,

Hope the month of May is going great.  Once again, I bring to your attention a recent analysis by the Public Company Accounting Standards Board on Financial Instruments.  In their most recent statement, they vociferously argued that they are continuously finding deficiencies at the Level 3 input level or as they described it, “unobservable inputs”.  They stated that auditors did not obtain an understanding of the methodologies and assumptions used from pricing services in deriving a fair value measurement.  Furthermore, the report went on to elaborate on the lack of testing the accuracy and/ or completeness of company data used to determine fair value as well.  The bottom line was that the work done by the auditors were subpar.

In this author’s humble opinion, the new credentials offered by the AICPA/ ASA in financial instruments along with IACVA’s Advanced Credential in Financial Instruments all have good intentions but is meaningless unless proper rules and practices are followed.  We can train auditors and valuators all day long but unless they are willing to do the “right thing”, it is all for nil. 

Until next time………………….


April 2019

Hi everyone,

Hope the month of April will be great for you all.  In this month’s blog, I like to discuss the first major IPO of the year 2019, LYFT. A lot of hype for a company that hasn’t turned a profit yet. It’s IPO was priced at $72 per share and it raised $24 billion. Why did it raise so much when it had continuing rising losses, low barriers to entry and most importantly, no network effects? Many analysts stated that Facebook succeeded mostly due to its network connectivity.  LYFT does not have that.  For instance, while Facebook users might not like its privacy policies, they still tend to stay because their friends are there.  As we know about supply and demand, the more people who use it, the more money it can generate from advertising.  Further, Facebook continuously adds new features which keeps users staying on. Now regarding LYFT, its drivers can be working for both LYFT and UBER. To the drivers, it really doesn’t matter which app the passengers uses. Furthermore, LYFT tends to focus on commuters seeking to go to work.  That is their bread and butter.  Knowing that, it is easy for competitors to focus on particular cities and take thier business away. What is most disconcerting is that revenues are growing and at the same time, losses are growing as well.  We all understand that the brick and mortar models don’t add up today in valuing these types of organizations.  Yet, investors should still be cognizant of true fundamentals. In closing, the world of valuation is more complex as ever. Enjoy the ride!!! Until next time………………………..


Fair Value Business Opportunities
March 2019

Hi everyone,

Hope all is well so far in the month of March.  This blog will discuss the importance of fair value in business combinations and acquisitions.  The genesis for this short on-line journal was an article written in this month’s Journal of Accountancy where the author strongly urged accountants to understand fair value when measuring complex M&A, goodwill and other intangible assets, bargain purchases, etc. While GAAP and IFRS are similar in terms of accounting treatment and disclosures, they are quite silent in terms of the actual approaches to be used in determining the value.  Another pertinent point mentioned in the article was that both the finance and accounting/ tax functions need to work together.  Without this coordination, costly tax and mispricing could easily take place. Another critical issue that warrants consideration is that balance sheet items that were never valued before, like internally developed intangibles, intellectual property, know-how, and brands need to be valued. The knowledge needed for these calculations often result in many companies using third-party valuation firms for their fair value estimates. Even with the use of third-party valuation firms, the internal organization should still look at the deal's model assumptions (discount rates, internal rate of return, hurdle rates, and cost of capital) and the final version of the deal model to use and should review the valuation output for reasonableness. As you can see from the above, the world of fair value will be here for quite some time! Until next time…………………………………


SEC Fair Value Results
February 2019

Hi everyone, 

This monthly blog today addresses the annual Securities and Exchange Commission’s (SEC) findings during examinations of publicly traded corporations.  Questions they pose to companies are labeled “Comment Letters” and once again for the years 2018 and 2017 fair value hit the top 10 issues and in particular, it was ranked #3. The SEC continues to ask registrants about (1) valuation techniques and inputs used in fair value measurements (including disclosure requirements for recurring and nonrecurring fair value measurements) and (2) the use of third-party pricing services. Furthermore, the staff frequently asked about fair value estimates with regards to revenue recognition, goodwill impairment, and share-based payments.

Specifically, they requested information from registrants related to valuation techniques and inputs used in fair value measurements. Companies needed to consider how fair value disclosures provide information about (1) the methods and techniques used to determine fair value and (2) the inputs to those models. Accordingly, the SEC also found lacking quantitative information about the significant unobservable inputs used in Level 3 fair value measurements. Lastly, the SEC continues to ask registrants to describe the procedures performed to validate fair value measurements obtained from third-party pricing services. The SEC requested registrants to clarify when and how often they use adjusted rather than unadjusted quoted market prices and to disclose why prices obtained from pricing services and securities dealers were adjusted.

Now you see why training in fair value measurement is so critical. Almost every year, these reports state similar results.  More to follow next month.  Until next time……..


M&A Results in 2018
January 2019

Hi everyone,

Welcome to 2019! Hope you all had an awesome and prosperous 2018. A lot will be happening in 2019 in the world of valuation.  At this time of the year, the results of many activities that took place in 2018 are being reported and analyzed.  Once such report from Willis Towers Watson and the University of London’s Cass Business School reported that M&A performance activity was at its worst in 2018. According to the study, The Global M&A market struggled to add value since the 2015 peak when it hit 10%.  The study stated that “2018 saw deal makers underperform in terms of shareholder value for an unprecedented fifth consecutive quarter, and record their worst annual performance for a decade.” Well, as many have stated in the world of valuation, synergistic value might be overrated. More and more studies are indicating such that.  Buyer beware!  In the year 2018, the performance was a -3% (see note below).  The study suggested that 2019 should be better but who knows? The best advice is to do your homework and be cautious about paying these so-called “synergistic premiums.” Until next time….

(NOTE: Share-price performance within the quarterly study is measured as a percentage change in share price from six months prior to the announcement date to the end of the quarter).

Upcoming Changes in 2019
December 2018

Hi everyone,

If you think the year 2018 has been the year of many changes in fair value reporting and disclosures, wait to you see what’s in store for 2019.  Many organizations, both in the valuation space and other allied fields, have promulgated new rules and standards that will require valuators to be current in their research.  Let’s take a brief look at the happenings for 2019. 

In the Pension Plan arena, for instance, both pension plan investors and managers will need to improve valuation rigor and expand due diligence. This will require these managers to document due diligence in a more formal manner.

In the Hedge Fund world, the Alternative Investment Management Association will require a stronger focus on the valuation of debt investments and less reliance on pricing services.

In the accounting world, the AICPA issued a working draft of an accounting and valuation guide, titled, "Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies” which also emphasizes consistency in valuing debt and equity investments.

The International Valuation Standards Council are creating standards for valuing financial instruments — with a focus on governance, framework, data sources and the impact on financial reporting.

These changes are just some of the items to look forward to in 2019. 

Until next year, have an awesome holiday season!



Southeast Africa Chapter
November 2018

Hi everyone,

The Conference held in Dubai on October 21st was a great success!! The International Association of Certified Valuation Specialists (IACVS) announced the launching of the Advanced Studies in Financial Instruments. This announcement were heard by the attending chapter presidents including the brand new Southeast Africa Chapter President, Dr. Dereje Tessema. This newest chapter will cover the countries of Ethiopia, Kenya, South Africa, Tanzania, Uganda. Rwanda, Zimbabwe, and Burundi. This Southeast Chapter will provide the latest in professional valuation and business training along with technical continuing education credits.  This Chapter, headquartered in Addis Ababa, Ethiopia, for starters will offer training programs and professional credential programs in business valuation, fair value measurement, management accounting, project management, data analytics and computer programming.  Additionally, this chapter will also form alliances with academic institutions to provide degrees and diplomas.  Until next time……..

Fair Value of Financial Instruments Training program
October 2018

Hi everyone,

Hope this blog finds you doing great.  For this particular blog, I am very excited to discuss the launch in October at the IVSC World Conference in Dubai, the advanced training program in fair value of financial instruments. This training program is first of its kind in that it is an “Advanced Component” of the highly respected ICVS credential issued by the International Association of Certified Valuation Specialists (IACVS). This training program is also unique in that it requires the learning of the Python programming language. This course is over 80 hours in length and can be viewed on-line or via hybrid classes (a mixture of live and on-line). The assessments will require a passing of both multiple-choice questions and a valuation case study using Python. As readily discussed in prior blogs, the need for accurate fair value, and in particular, for financial instruments, is more important than ever as regulators are cracking down on questionable valuation practices and assumptions.  It is hoped that this training program will help stem the tide.  Until next time….


Future of Business Valuation
September 2018

Hi everyone. 

Hope your September is going great! A topic of interest that every professional membership organization is carefully studying is Artificial Intelligence (“AI”) and its impact on its profession.  Go to any professional conference and you’ll see some speaker addressing either AI, Machine Learning, Blockchain, and/ or Big Data.  We should label them the new Big 4! As one who attends many academic or professional conferences, I could be the first to attest that one of those four topics will be discussed. Depending upon the speaker’s intention, it could be one of “doom and gloom” or one of opportunity and success.  I for one always like to look at the positives in all innovations.  The Industrial Revolution in both England and the US was also predicted to create mass unemployment. It did quite the contrary. 

With all this said, how will this affect business valuation? Stock Valuation? Only time will tell but if history is any indication of the future, the future will be bright. Employment displacement might occur in some areas of valuation but overall, new areas will emerge in valuation and create brand new opportunities for those seeking it.  For example, a financial analyst seeking to determine the risk level of a publicly-traded company would have to sift through hundreds of pages of annuals and quarterlies. 

With AI, a valuator can train the machine to learn from human language. For instance, instead of the valuator reading the Management Discussion and Analysis, the machine can. The machine, over time, would be able to filter out changes in language and wording to detect red flags.  As you could tell, the valuator is not being displaced but refocused on analyzing the results of the AI.  Let’s enjoy the ride!! Until next time……


The Magnitude of Stock Market Swings
August 2018

Welcome everyone, July and August 2018 have been some ride! Apple breaking the Trillion-dollar market capitalization mark and Facebook Inc.'s stunning $119 billion stock market loss July 26 created major headlines across the board.  While Apple was the first to break the Trillion-Dollar mark, Alphabet (Google), Amazon, and Microsoft are not too far behind. We throw these numbers around in everyday conversation. To put these numbers in perspective, the $119 billion dollar drop in ONE DAY by Facebook is larger than Kuwait’s GDP and 129 nations as well based on 2017 IMF stats.  If you look at Apple’s $1 Trillion-Dollar breakthrough, is approximately the size of Indonesia’s GDP and also larger than 174 other nations as well (IMF 2017 data). Also, how can we forget Elon Musk, chief executive officer of Tesla Inc., SpaceX and other companies and Papa John’s Pizza Ltd. founder John Schnatter who both made comments which resulted in immediate down pricing of stock. The real question, as always, is that there a difference between price and value.  For day traders, this volatility is music to their ears but for valuators and analysts trying to decipher intrinsic value, not the case. Why such volatility? In my next blog, I will go over a recent academic study on Earnings Management and the various players involved.  Until next time……..


Business Valuation Due Diligence
July 2018

HI everyone! Today’s blog is about due diligence in business valuation and Mergers/ Acquisitions.  There isn’t a day that goes by without another announcement of a merger taking place. Amazon and Whole Foods, CVS and Aetna, General Mills and Blue Buffalo just to name a few. Of course, how can we forget ATT and Time Warner and the bidding war over Fox Assets by Disney and Comcast. We all know in the valuation field that there is very high probability that acquirers are overpaying for these acquisitions. In a Harvard Business Review article, it suggested that study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. While there are many reasons for these failures, one of the primary reasons is the overpaying for these acquisitions.  Nevertheless, all the major law firms and accounting firms all utilize similar due diligence check sheets and valuation programs.  Yet, has anyone developed an effective due diligence model that quantifies qualitative components as well?  Since 70%-90% fail, maybe a quantification of non-financial aspects should be valued as well to have a complete picture and lessen the failure rate. Your thoughts? Until next time…….


Intangibles and Valuation
June 2018

Hi everyone,

Hope this blog finds you all doing well.  Once again, we see the traditional “brick and mortar” accounting valuation techniques not reflecting what the market sees or pays. Companies that haven’t produced a profit have been selling for astronomical values.  For example, according to a recent article in Bloomberg “Oddball valuations boost case for changing smokestack-era rules”, Autodesk Inc. which have been losing money for almost three years along with its negative book value, had its stock gained 23 percent which almost double the S&P 500. What the heck is going on (lol)?  NYU professor Baruch Lev in his recent book, “The End of Accounting” demonstrates how accounting has lost its relevance in the 21st century. Accounting that worked for shipbuilders and oil drillers are not the same for the new, intangible-based economy. Not recognizing intangible assets can push down both profits and book value in businesses that depend on research and marketing, which are increasingly important in the global knowledge economy. Just think Tesla, Nike or Gilead Sciences.

The bottom line is that “You’ve got all these assets that don’t show any value in their financial statements that are just becoming more and more valuable in today’s society,” said Travis Fairchild, a fund manager at O’Shaughnessy Asset Management in Stamford, Connecticut. Further, spending on research and sales as a percentage of revenue rose to 14 percent in 2017 for S&P 500 stocks, compared with 7 percent a decade ago, data compiled by Bloomberg show. More astonishing is that there are now 187 stocks worldwide with negative net assets and a market value of at least half a billion dollars -- with an average return of 27 percent in the past year -- compared with 90 a decade ago, data compiled by Bloomberg show. Professor Lev pointed to the example of Kite Pharma Inc., which had posted a loss every quarter since its public debut when Gilead Sciences Inc. bought it for $12 billion last year. What was Gilead after? Kite’s cancer therapies. It is in my opinion that it is only a matter of time when financial reporting will adjust to the new times. Until next time……


Delaware Courts are Setting the Tone
April 2018

Hi everyone, once again the Delaware Supreme Court has delineated its position on fair value. In keeping with its most recent opinions on DFC Global Corporation and Dell Computers, the courts once again upheld the concept of transaction price in lieu of fair value calculations. In two different decisions on the same day, first the Delaware Supreme Court in Merlin Partners, LP v. SWS Group, Inc. accepted the merger price and not the expert’s 8% write-down of the merger price due to risk.  In the second case regarding the AOL, Inc and its appraisal with the regarding the Verizon merger, the Court of Chancery once again confirmed that the merger price should stand and not the appraiser’s fair value calculation. These recent cases are establishing a solid pattern in which valuators need to consider. Most would agree that the actual merger price should dictate the value as they are between two knowledgeable parties without any compulsion to sell.  Until next time….


Time to Get Serious with Fair Value
March 2018
Hi everyone, Hope all is going well. Let's talk about fair value again and in particular, intangibles. Books and articles have consistently been written on the pros and cons of fair value. More recently, just a little more than a year ago, Dr. Baruch Lev of NYU wrote a book called "The End of Accounting." What's its premise? Accounting is no longer relevant for investors. He presented his arguments by demonstrating the inadequacies of accounting for intangibles. Most intangibles are not on the books and unless you really have a strong understanding of GAAP, one would assume that either firms have no intangibles or its buried somewhere. Let's take my family's favorite place to visit-- DISNEY. What conjures up when you think of Disney? Mickey Mouse? Donald Duck? How would you like to know that these household characters are nowhere on the financial balance sheet? It's true. Any internally generated intangibles are not included on the Balance Sheet other then some minor legal expenses. Yet, when Disney purchased Marvel Comics, the Goodwill (the price paid in excess of the fair value of net assets) was on the Balance Sheet as it was "PURCHASED GOODWILL." Needless to say, it takes someone quite astute to understand accounting for intangibles. When Warren Buffett analyzes a company, he tells his analysts not to only focus on the Balance Sheet but what is not on the Balance Sheet. Until next time. Joel
Valuation Insights- DIgital FIrms
February 2018
HI everyone, Hope all is well. I came across an interesting article about the valuation of digital firms and how the traditional means of valuation don't hold. For instance, in the Harvard Business Review (HBR) article by Govindarajan, Rajgopal, and Srivastava, they discussed the possible Uber IPO which the estimated value is between $48 to $70 billion despite having losses for the last two years. Yet a company such as GE who announced its first loss in the last 50 years had its stock price decline by 44% last year. More confusing are situations where astronomical valuations such as the purchase of WhatsApp for $19 billion when it did not even generate revenues. What gives? Well, according to the authors of the HBR article, accounting earnings and the balance sheet are irrelevant for valuing digital companies. The author's presented the following facts: "Many digital companies have no physical products and have no inventory to report. Therefore, the balance sheets of physical and digital companies present entirely different pictures. Contrast Walmart’s $160 billion of hard assets for its $300 billion valuation against Facebook’s $9 billion dollars of hard assets for its $500 billion valuation." The building blocks for a digital company are research and development, brands, organizational strategy, etc and as we know in accounting, these are not capitalized as assets; they are treated as expenses in calculation of profits. This therefore, will render the income statement showing negative performance. As digital companies become more prominent in the economy, and physical companies become more digital in their operations, income statements too have become less meaningful in investors. Techniques to improve the conveyance of value on financial statements will hopefully be emerging to assist investors in making appropriate investment decisions. Welcome to the world of valuation! Til next time.
Goodwill Impairment Testing- Here we go again!
February 2018
Hi Everyone, As you all know, FASB has once again changed the goodwill impairment testing. This is now the second time since 2011 the Board has changed the goodwill impairment testing for public companies. Now, it is back to a one-step impairment test. Under this approach, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This updated standard eliminates the second-step which compares the implied fair value of goodwill with its carrying amount. Under the second-step, the implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. They eliminated the second step as it was quite time consuming and costly. Let's not also forget that in 2014, FASB accepted the recommendation of the Private Company Council which permits private companies to make an election to amortize goodwill. The amortization of goodwill was done in the past for publicly traded companies as well. Let's not even broach the tax treatment of goodwill. As valuators, these constant changes have major impacts on our valuations. I wish for once that goodwill and its impairment treatment can be a settled issue. Speak to you soon!!!
Tax Cuts and Jobs Act of 2017 and Valuation Implications
January 2018
Welcome everyone. A question that gets asked quite frequently over the last few weeks is how the Tax Cut and Jobs Act of 2017 will affect valuations. Putting politics aside, there are many areas one could address. The valuation repercussions on private companies and public companies are manifold. Throughout the year, I will be addressing from time to time some of the commentary regarding this matter. For instance, Warren Buffett said that as a result of the new tax legislation, a shareholder’s share of the profits went to 79% from 65% percent and that the earnings power of corporations have increased 20% without doing anything! Many new projections on earnings per share for 2018 has been forecasted upwards of 10% to 20%. These results suggest that valuators would need to reevaluate their assumptions and readjust. Stay tuned!
Public Company Accounting Oversight Board's analysis of Fair Value Measurement
January 2018
Hi everyone! Happy New Year! The beginning of the year starts off with plenty of economic events which will impact our daily decisions in investing, financing, and of course, valuing!! This week's blog is about a report that came out from Acuitas, a major valuation firm headquartered in U.S. They did an analysis of the conclusions reached by the Public Company Accounting Oversight Board (PCAOB) of the examinations they conducted of the audit workpapers of major CPA firms. PCAOB again has noted major deficiencies in the quality of fair value measurement workpapers to the extent that it represented 31% of all the audit deficiencies noted. This number is probably on the low side as well due to the size of the audit selection. What's the moral of the story? Fair Value Measurement is a complex area that totally needs more sophisticated training as it is here to stay. Be well and please feel free to forward comments to my blog articles.
Delaware Supreme Court Valuation Reversal of Dell Computer Valuation case
December 2017
Hi everyone! Welcome to my blog and the Center for International Business Valuation. I will be posting new and interesting topics on a weekly basis. This week's blog is an example of the adage that valuation is as much an art as it is a science. Some might even call it a mystery. The Delaware Supreme Court once again overturned the Delaware Court of Chancery's opinion on a valuation case. This one happened to be on a recognizable name, Dell Computer. The point of this case, without boring you with all the details which are readily available, is that the selling price of stock in an arm's length transaction should weigh heavily in any dispute with disgruntled shareholders. The use of the Discount Cash Flow method and its calculation by the Chancery Court in deciding the stock's value should not outweigh an actual sales price. The Supreme Court was harsh in that they stated that is was an abuse of the Chancery's Court discretion in doing such. The bottom line is that the Delaware Supreme Court believes in the Efficient Market Hypothesis in that the market price is a more reliable assessment of value. Keep this in mind!! Speak to you all next week.