Our professionals engage with clients from various industries to provide valuation advice and opinions for financial reporting, tax compliance, and economic and advisory purposes. The following is a sample list of areas for which valuation opinions are needed:
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Our management consulting practice assists clients with business case development and decision support analysis.
We provide valuation advice and opinions for financial reporting, tax compliance, and economic and advisory purposes.
Our management consulting practice assists clients with business case development and decision support analysis.
We have a variety of positions available in both our Valuation and Management Consulting practices.
VALUATION – ASC 718
ASC 718 addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It generally requires that such transactions are accounted for using the fair-value method.
VALUATION – ASC 805
ASC 805 [SFAS 141R], the successor to SFAS 141, by the Financial Accounting Standards Board makes accounting for business combinations more in tune with the principle of fair value accounting and to increase transparency through expanded disclosures. It changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. Significant changes from SFAS 141 are included as shown in the figure on the left.
ASC 805 also requires an acquirer to recognize the assets accrued, liabilities assumed, and any non-controlling interest at fair value as of the acquisition date. Previous cost-allocation process requires the cost of an acquisition to be allocated to assets acquired and liabilities assumed based on fair values.
Our valuation professionals can assist your finance and accounting managers with initial determination of fair value of acquired assets. We can also set up valuation models for you for items that need periodic updates (i.e. contingent consideration) which could be performed internally.
VALUATION – EMBEDDED DERIVATIVES ASC 815
Rapid growth of hedge funds and private equity investments brought the wave of recapitalizations involving new issues of convertible bonds and preferred stock with warrants and complex conversion features. These new structures carry embedded derivatives that need to be bifurcated from the host instrument and accounted for as liabilities and marked to market periodically. Some of the most common situations involve the following:
- Preferred stock with varying conversion price based on future uncertain outcomes, i.e. Company going public by certain date;
- Anti-dilution protection afforded in the financing agreement, which rendered the number of shares issuable to be indeterminate;
- Lack of sufficient number of authorized shares when new preferred, options or warrants are issued;
- Options to purchase additional shares.
Once the accounting treatment, under ASC 815, is determined by Company’s accounting staff and its auditors, we would develop valuation models to determine Fair Market Value of the derivatives. Such models, including key assumptions, can then be easily updated for periodic marking to market.
VALUATION – ASC 820
ASC 820 requires companies to re-evaluate the way in which they measure the fair value of assets and liabilities. ASC 820 considers fair value from the perspective of a market participant that owns the asset or liability (an exit price), defining fair value as:
“. . . the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
Intended to increase consistency and comparability in and expand disclosures about fair value measurements, the Statement establishes a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 – quoted prices in active markets for identical assets and liabilities;
Level 2 – inputs other than quoted market prices that are directly or indirectly observable for the asset or liability, including quoted prices in an active market for similar assets or liabilities; quoted prices in a market that is not active for same or similar assets or liabilities; inputs other than quoted market prices that are observable for the asset or liability; and inputs derived from observable market data by correlation or other means; and
Level 3 – unobservable inputs reflecting the company’s assumptions about the inputs that a market participant would use to price the asset or liability.
The Statement emphasizes that fair value measurement is market-based, not entity-specific. It requires a company to identify the assumptions that a hypothetical “market participant” would use in determining the fair value of an asset or liability.
In measuring the fair value of assets, a company should consider the “highest and best use” of those assets, again from the perspective of a market participant, even if that use is inconsistent with how the management of a company intends to use the asset. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market (greatest volume and level of activity) for that asset or liability, or in the absence of a principal market, the most advantageous market (greatest profit).
Implementation of the Statement could substantially impact the fair value of your assets and liabilities, making it important to rely on a qualified valuation professional for fair value measurements. Value Prism Consulting can identify the assets and liabilities that may be affected by ASC 820 and can recommend changes to models and methodologies in order to comply with the Statement. Our professionals have worked with clients of all the major accounting firms for a wide variety of financial reporting purposes. A typical ASC 820 valuation project generally follows the approach:
- (Optional) Review the Balance Sheet to categorize assets and liabilities that may be impacted by the Statement;
- Examine the process, models, and results of valuation for each of the assets and liabilities;
- Prepare a report for management that describes each of the valuations according to the current Input Level and where changes should be made to move the inputs up the Level hierarchy;
- Work with management to prioritize the valuations that require changes;
- Perform valuation of each of the items on the prioritized list, including a full report on the method used and compliance with ASC 820; and
- Assist with the compilation of required disclosures.
During the entire project, our professionals work closely with management, auditors, and other stakeholders to ensure that the process and results are accurate and acceptable.
VALUATION – ASC 350/360
Our valuation professionals can provide you with highly supportable and well documented fair value estimates for goodwill impairment testing purposes. With significantly increased scrutiny from auditors, Value Prism Consulting’s experience and independence will reduce risk of accounting problems. The impairment testing guidance is shown in the figure below.
- Identify reporting units
- Allocate any corporate assets/liabilities and balance sheet items to the reporting units to determine carrying value
- Compare “baseline valuation” inputs to current market data, industry forecasts, and entity specific assumptions
- Evaluate new inputs impact on each Reporting Unit’s (RU’s) valuation
- Determine if Fair Value is “more likely than not” greater to carrying value for each RU
* No further analysis is necessary if Fair Value “more likely than not” greater than carrying value
- Determine Fair Value using DCF, Comparable Companies, and other appropriate methods; reconcile aggregate value of the RUs to market capitalization (incl. Control Premium)
- Compare fair value to carrying value of each reporting unit
- Identify long-lived tangible and intangible assets
- Perform un-discounted cash flow test
- Identify primary asset of the RU if cash flows can be identified as asset level
- Sum up cash flows over the remaining useful life (RUL) and add value from disposal
- Compare the sum of un-discounted cash flows to carrying value
- Determine Fair Value of long-lived assets. If Fair Value is less than carrying value, impair (write off) the asset to its Fair Value
- Allocate Fair Value to tangible and intangible assets including assets currently unrecognized on the balance sheet
- Calculate residual goodwill value
- Carrying value minus new residual value equal the amount of impairment
VALUATION – IRC SECTION 409a/VALUATION OF PRIVATELY-HELD COMPANIES
IRC Section 409A became effective January 1, 2008 (January 1, 2009 for those qualified under transition relief) and imposes a number of requirements with respect to nonqualified deferred compensation plans to employees, including the requirement that stock options and stock appreciation rights (SARs) be granted with a strike price at least equal to Fair Market Value of the underlying stock. The IRS is concerned that stock options and SARs issued “in the money” are really just a form of deferred compensation.
The SEC and AICPA also scrutinize the S-1 filers to make sure that past option grants were made at fair value when the stock based compensation expense is recorded under ASC 718. In order to comply with SEC and AICPA requirements, the AICPA Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation” needs to be followed.
The Practice Aid describes three methods for valuing preferred and common stock of a privately-held firm: Current-Value Method (CVM), Option-Pricing Method (OPM), and Probability-Weighted Expected Return Method (PWERM). The Practice Aid also mentions that “no single enterprise value allocation method appears to be superior in all respects and all circumstances over the others.” This statement is consistent with our research into methods used in practice by privately-held firms.
We have substantial experience working with our clients on all three methods described by the Practice Aid, and have even developed a proprietary hybrid model which we believe more accurately attributes enterprise value to each class of shareholder. In many cases, implementing the methods in the Practice Aid is significantly more difficult than depicted there. For example, the OPM can be much more complicated than the two-class model example in the Practice Aid. Below is an example diagram of the OPM in which the firm has gone through four rounds of financing, each creating an additional class of preferred stock. As you can imagine, the more complex the capital structure, the more complex the valuation of each component.
Our qualified professionals can help you and your portfolio companies avoid being subject to 409A by demonstrating that all stock options and SARs are issued “at the money”. We will prepare a valuation report that considers the cost, income, and market approaches to value, as well as any specific lack of control and liquidity characteristics of the underlying stock. We will work very closely with your management team and audit firm to ensure that our valuation is consistent with the business and most recent audit guidelines. Our valuation will also be consistent with valuations performed for other purposes including the above mentioned AICPA Practice Aid.
For more information on effective dates for IRC 409A, see the IRS Bulletin here.
VALUATION – PRICING ANALYSIS
Our Pricing Analysis services provides companies with an estimated range of business enterprise values (BEV) that gives management insight for informed business decision making. The Pricing Analysis can be used for a wide variety of planning purposes, such as a potential sale of your company or business unit. In this case, our analysis can be helpful in determining a fair price for the business being sold.
In completing our analysis, we will consider all three generally accepted valuation methodologies: the income, market, and cost approaches.
We agree not to use or discuss such analysis or supporting information to any person or entity except in connection with the issuance of our report or as otherwise required by order of any court.
VALUATION – PEIGG
In March 2007, the Private Equity Industry Guidelines Group (PEIGG) updated their “U.S. Private Equity Valuation Guidelines” to be consistent with GAAP, specifically the recently released SFAS 157 (now ASC 820). The objective of this update, according to PEIGG, is to “provide managers a framework for valuing investments in portfolio companies at fair value and to provide greater consistency within the private equity industry with regard to valuations.”
What this means to you as a financial manager of a general partner is that the concluded fair value of each of your portfolio companies will come under greater scrutiny by your limited partners and auditors alike. Though PEIGG provides guidelines for consistency, the mechanism for valuation is ultimately up to you. In their guidelines, PEIGG does suggest the following:
- Value often. An update to the fair value conclusion for each portfolio company should be performed regularly (e.g. quarterly) and/or directly subsequent to additional financing, whether or not your firm is involved in the latest round.
- Utilize the market approach. Due to the general nature of portfolio companies, it is often best to look at comparable companies or determine a performance multiple for valuation purposes. Income and cost approaches are often too subjective and dependent on “Level 3” inputs to be reliable fair value conclusions, especially in early-stage companies.
- Use the latest round at your risk. Historically, the value of the portfolio company has often been derived simply from the price paid by the latest investors. This method is fraught with problems, as each round of financing has potentially vast contractual differences. The latest round can be used as an input into the valuation process, but should not be relied upon as the sole determinant of value.
Shown here is the high-level process that we use to perform valuations of portfolio companies, according to the PEIGG guidelines and ASC 820. We work closely with general partner management, portfolio company management, limited partners, and auditors to ensure the valuation is accurate, supported, and timely.