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The Key to Managing Value Drivers

If you ask a business appraiser what your company’s value drivers are, he may respond with definitions of the variables found in a net present value formula, or a description of the empirical data used to arrive at the cost of capital, financial leverage, and the rate of earnings growth.

This is because valuation calculations are most affected by small changes in four assumptions:  Read More…

Financial Accounting and the Myth of Corporate Longevity

Originally published in the New York Law Journal on April 11, 2011

The Financial Accounting Standards Board (FASB) continues to issue pronouncements that are intended to improve investors’ and lenders’ ability to value equity and debt securities. Numerous statements, revisions and interpretations have defined and implemented that element of Generally Accepted Accounting Principles (GAAP) known as the Fair Value standard.  Read more…

Restructuring on the Fair Value Battleground

Originally published in Financier Worldwide on September 2008

U.S. lenders once again have become more selective in their choice of borrowers, if they are able to lend at all. As increasing loss loan reserves deplete banks’ already deflated capital accounts, the markets for non-investment grade debt obligations have dried up, leaving many banks without even the last resort option of selling downgraded loans at a loss.  Moreover, “covenant-lite” loans have restrained many commercial banks and asset-based lenders from pursuing  Read More…

Valuation Penalties under the Pension Protection Act

Update of the original published in the Dec. 2008 issue of National Litigation Consultants’ Review

Since the passage of the Pension Protection Act, it is much more likely to see large underpayment and negligence penalties imposed on taxpayers than in the past.  A 20% to 40% underpayment penalty is now applicable in income, estate and gift tax returns that are filed without qualified valuations or claim unsubstantiated valuation discounts.  Read more…

The Great Transformation - the political and economic origins of our time

Published in 1944 were two books that became famous for their authors’ opposing interpretations of the history and effects of economic markets. While both works have attained the status of classics in academic circles, one of them, Friedrick Hayek’s The Road to Serfdom, became well-known in the field of economics. In the 30 years following World War II, the popularity of European social democracies expanded and Keynesian economics became a template on which an enormous program of government intervention and regulation was built in the United States. During this time, The Road to Serfdom was forgotten by the public and practically ignored by economists until 1974, when Hayek won the Nobel Prize in economics for his work that demonstrated the futility and corruptibility of planned economies. Hayek’s free market principles became a driving force behind the policies instituted by the Reagan and Thatcher administrations to create a deregulated market system that resulted in 25 years of uninterrupted economic growth.  Read more…

A New Approach to Out of Court Restructuring

Originally published in the National Litigation Consultant’s Review on October 2009

Reorganization under Chapter 11 of the U.S. Bankruptcy Code was designed to provide an alternative to receivership and liquidation. Successful cases are a transfer of the reorganized company as a going concern to the existing claim holders, who effectively exchange their existing interests for interests in a new entity. However, the very premise of the Chapter 11 process is flawed as a result of its adherence to a perception of ownership rights that in most cases no longer exist.  Read more…

Solving Insolvency

Originally published in the National Litigation Consultant’s Review on June 2009

When retained to testify as an expert witness before the New York Stock Exchange (NYSE) arbitration panel, I expected the assignment to consist of a straightforward determination of whether a member brokerage firm had been insolvent at the time of a failed transfer of a large block of securities. Instead, I found that the facts that might support a conclusion that the defendant was clearly insolvent—the fulcrum of the plaintiff ’s case—could be interpreted in ways that would support a finding of solvency or insolvency, depending on the definition that the NYSE chose to rely on. This, in essence, was my testimony, which neither the arbitration panel expected, nor my client wanted to hear. However, it was a true representation of the facts, and in some ways encouraged the parties to settle the case. The conundrum existed at the time primarily because of the many precedent court decisions that had slightly modified the definition of insolvency to address the circumstances of a particular case.  Read more…

A Market of Lemmings

Value is in the eye of the beholder. A market consisting of a collection of beholders is presumed by many authoritative sources to be the best determinant of how valuable something truly is. The first premise of that presumption is that at least two of the market participants have made the correct determination and the correct value is observable as the price at which they agreed to transact. The second premise is that of those who have access to all available information about the asset, and have the capability to analyze and arrive at the correct conclusion, at least two of them are also sufficiently motivated by economic incentive to realize the value of their information and analytical effort by actually engaging in a transaction at a price that can be observed by others. The third premise is that if only one buyer knows what the correct value is, he or she has the confidence and motivation to be willing and the resources to be able to transact with all sellers asking for less than the correct value until only sellers asking for more than the correct value remain.  Read more…

New Requirements in the Valuation of Acquired Assets

Statement on Financial Accounting Standard 141 – Business Combinations (FAS 141) was issued in 2001 and provided guidance regarding how an acquirer measures and recognizes identifiable assets, assumed liabilities, and any non-controlling interests of the acquiree. It also addresses the measurement and recognition of acquired goodwill, gains resulting from a bargain purchases, and specifies disclosures that enables the users of the financial statements to better evaluate the financial effects of the business combination.  Read more…

Valuation in Bankruptcy

Originally published in the New York Law Journal on April 28, 2008

On FEB. 27, 2008, the Financial Accounting Standards Board (FASB) issued proposed FASB Staff Position 90-7, an Amendment of AI CPA Statement of Position 90-7. The proposed amendment would remove the requirement in AI CPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), that an entity applying fresh-start reporting must early adopt authoritative accounting standards that will be applicable to the emerging entity’s financial statements within 12 months following emergence.  Read more…

Hard-To-Value Retirement Plan Assets

As employer and broker-sponsored retirement plans continue to fail in their sole purpose of providing a reliable retirement income, the distinctly American traits of independent thinking and self-determination have materialized in the form of an exponential increase in self-directed retirement plans. Managed by the beneficiary, self-directed IRA and 401k plans frequently hold hard-to-value assets, such as early stage companies, partnership interests, undivided real estate, restricted stock, promissory notes, options, contracts, and even intellectual property. Read more…

Risk Management In A Nut Shell

ERM: a solution that is simple, elegant… and wrong

The popular attempt to convert management decision making processes into a theoretically less-fallible integrated enterprise risk management “system” has blurred investors’ and executives’ view of real risks. Instead of taking real actions, the risk management profession has become focused on manipulating numerical quantifications of estimated effects that real risks might produce under a specified range of expected economic, market, and financial performance conditions.  Read more…