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Valuation framework seeks to define ‘how much’ is enough

Tammy Whitehouse | June 23, 2016

The American Institute of Certified Public Accountants, the Society of Appraisers, and the Royal Institution of Chartered Surveyors have teamed up and issued for public comment a proposed Mandatory Performance Framework that is meant to help define just how much work, analysis, and documentation should go into a professional valuation.

That’s not the same as technical or professional standards, which tell valuation professionals how to do a valuation. The valuation profession has plenty of professional standards from various valuation and appraisal groups that explain how to go about performing a valuation. The proposed MPF is meant to help define when enough is enough.

Along with the proposed mandatory performance framework, the three groups have issued a proposed companion document, the Application of the Mandatory Performance Framework, which explains how to apply the MPF to different types of valuations, like the valuation of a business versus the valuation of an intangible asset.

Over the past two decades, the use of fair value in measuring the assets and liabilities reported on corporate balance sheets has grown considerably. More accounting standards require it, and regulators are exercising more scrutiny over how numbers stated at fair value are established and audited.

The Securities and Exchange Commission has called on the valuation profession to better organize itself and raise the bar on its professional performance because of how important valuation was becoming to financial reporting. It also called on companies to take greater ownership over the estimates and assumptions behind the valuations that factor into financial statements.

The Public Company Accounting Oversight Board in particular has called on auditors to get more skeptical and gather more documentation and evidence to support their audit opinions. That has nudged auditors to increase their demands around fair value measurements to better satisfy regulators. The board says it is working on a proposal to upgrade auditing standards as well, but there's no time line on when that might happen.

All of that inspired the AICPA, ASA, and RICS to form the Fair Value Quality Initiative, a task force working to identify the issues facing the valuation profession and determine how to address them. The groups are looking to develop and implement a new professional credential that would enhance consistency and transparency in the fair value measurement process. Key components of this new credentialing program will include ongoing quality oversight and compliance with the proposed performance framework.

While the use of fair value in accounting and financial reporting has grown in recent years, it could get even more important if the Financial Accounting Standards Board decides to go down the path of requiring companies to report values for intangible assets. Currently, intangible assets only show up in the balance sheet if a company acquires another business, so that the value of the transaction can be reflected on the books.

When it comes to the value of homegrown intangible assets, however, investors have little insight into what those are worth. FASB member Tom Linsmeier, soon to end his second five-year term at FASB, recently said the board should consider at a minimum requiring more disclosure about the cost and fair value of such intangible assets. “The current accounting model fails to provide much information on most internally developed intangible assets, resulting in an often-increasing market to book ratio for these organizations and leaving users with little financial reporting information to make their valuation assessments,” he wrote.

The AICPA, ASA, and RICS initially issued their framework proposals and sought comment through June 24. Now the groups are extending the comment period another two months to Aug. 24.