Purchase Price Allocations (ASC 805)
Under ASC 805 (formerly SFAS No 141 and 141R) an acquirer must measure the fair value of assets acquired in an acquisition. BVA produces opinions for both tangible and intangible assets, liabilities and equity interests.
Indefinite-Lived Asset Impairment Testing (ASC 350)
Annual Impairment tests are required under ASC 350 (formerly SFAS No. 142) to test goodwill and related intangible assets for loss in value.
Cheap Stock Valuation
Investopedia describes “Cheap Stock” as the “practice of issuing stock or other equity securities at artificially low prices before an initial public offering.” In a memo (Feb. 20, 2014) issued by Winston & Strawn, LLP, the firm notes that the SEC is closely monitoring companies' issuance of pre-IPO stock based compensation awards. Specifically the SEC in its recent revision to Section 9520 – Share-Based Compensation in IPO’s notes the following:
9520.1 Estimates used to determine share-based compensation are often considered critical by companies going public. In particular, estimating the fair value of the underlying shares can be highly complex and subjective because the shares are not publicly traded. The staff will consider if a company performing these estimates is providing the following critical accounting estimate disclosures in its IPO prospectus:
a. The methods that management used to determine the fair value of the company’s shares and the nature of the material assumptions involved. For example, companies using the income approach should disclose that this method involves estimating future cash flows and discounting those cash flows at an appropriate rate.
b. The extent to which the estimates are considered highly complex and subjective.
c. The estimates will not be necessary to determine the fair value of new awards once the underlying shares begin trading.
Companies may cross-reference to the extent that this, or other material information relevant to share-based compensation, is provided elsewhere in the prospectus.
To support option or stock grants, we provide independent third party opinions of value. Our valuation procedures are conducted in accordance with the AICPA Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.”
Valuation for Compensation Expense Determination - IRC Section 409(A)
Similar to “Cheap Stock” above, in many cases privately-held companies at various stages of development issue or grant equity or equity equivalents as compensation. Because an active market for these securities does not exist, the value of these securities needs to be determined. There are historically four methods to value these securities for fair value purposes, according to the AICPA Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”:
- Use of “rule of thumb” discounts from prices of other securities,
- Internal valuation based on management’s or the board of directors' best estimate,
- Substantial sale to unrelated parties, or
- Valuation by an unrelated valuation specialist.
Importantly however, some of the methods above may not meet the FMV requirements of the Internal Revenue Service and an independent third party appraiser will be needed. While the methodologies to determine value may be similar, the opinion of value must meet IRS requirements.
BVA welcomes inquiries about our services. Contact Brentmore Valuation Advisors online, email us at EdP@BrentmoreAdvisors.com, or call 860.519.5648.