Financial Reporting Valuations

Financial reporting valuations must comply with the standards set by the Financial Accounting Standards Board (FASB). The transfer of certain assets (i.e., intangible assets, goodwill and stock based transactions) may trigger a need for valuations that comply with those standards. The American Business Appraisers National Network has professionals that are specifically trained to determine fair market value in these special situations.

Intangible Assets And Goodwill

Accounting rule changes from 2001 require that the purchase price in a transaction be allocated to the target company’s tangible and intangible assets (SFAS No. 141); and that the resulting goodwill be examined every year and tested for impairment (SFAS No. 142). Some ABA professionals are extremely well-qualified in determining the fair value of intangible assets in connection with these rules.

Tangible Assets: Machinery & Equipment Appraisals

Machinery & equipment appraisals (M&E appraisals) are specialized appraisal services conducted for a variety of purposes to substantiate equipment values. An appraisal completed by a Certified Machinery & Equipment Appraiser (CMEA) is a comprehensive and detailed report including photographs, model numbers, serial numbers, and other descriptive information. Value conclusions are based on extensive research, personal inspection, and contact with manufacturers and suppliers to determine the real worth of various machinery and equipment assets.

M&E appraisals conducted by a CMEA are:

  • Certified reports
  • Follow the Uniform Standards of Professional Appraisal Practice (USPAP)
  • Meet compliance standards of financial institutions
  • Withstand the scrutiny of lenders, CPAs, courts, and others

Contact one of American Business Appraisers’ Certified Machinery & Equipment Appraisers today for further details.

Tangible Assets: Real Estate Appraisal Services

Although business valuation and the appraisal of real estate are frequently viewed as separate disciplines, the underlying principle for each is the same: value is the present worth of anticipated benefits.

Both business appraisers and real estate appraisers base their opinions on the income stream generated by the subject asset (except when the real estate is land only). Each discipline has its own label for the income stream. The real estate appraiser labels it “net operating income” (NOI) and the business appraiser calls it “net income before or after tax”. Both use the same approaches to value (cost, market, and income) as well as the same standard of value (market value). In real estate valuation, tangible assets, such as land and buildings, provide the basis for value.

There are two notable differences:

  • Real estate appraisals are traditionally based on a “before debt basis”.
  • Capitalization and discount rates for real estate valuations tend to be lower than those for business valuations.

A quality appraisal is supported by evidence found in the marketplace. The methods and standards of value employed are the same regardless of the intended use of the appraisal: marriage dissolution, financing, gifting, tax appeals, and so on. The more unique the appraisal project, the more qualified and experienced the appraiser must be. Examples of unique (special purpose) properties include: landfills, mineral rights, lakeshore, radio towers, and major shopping malls. If the real estate to be valued also includes a business owned by the same individual, the real estate appraiser and the business appraiser should work together to measure value.

Stock Based Compensation

SFAS No. 123(R) requires companies to reflect the fair value (as opposed to intrinsic value) of options granted to employees as an expense to book income. Internal Revenue Code 409A provides an expansive definition of deferred compensation to include discounted compensatory stock options and stock appreciation rights. That is, it applies to stock options having an exercise price that is less than the stock’s grant date fair market value. This raises important issues as to how private, venture-backed companies value their common stock. To value the options, the fair value of the company’s total equity (common and preferred) must first be determined. The total equity value must then be allocated to the components of equity (i.e., common, preferred, etc.). Some ABA professionals are well-qualified in applying the methods to allocate the company’s total equity value (i.e., the current value method, the option-pricing method, and the probability-weighted expected return method).

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