Valuation Resource Group MINUTES OF MEETING April 12, 2010

Transcription

1 Valuation Resource Group MINUTES OF MEETING April 12, 2010 The FASB Valuation Resource Group (VRG) met with the FASB Board members and staff in a public meeting at the FASB offices in Norwalk, Connecticut on April 12, 2010, from 3:00 to 4:30 p.m. The VRG also met with the FASB staff in a closed session from 9:30 a.m. to 2:45 p.m. The meeting minutes reflect comments made during the public meeting only. The following individuals participated in all or portions of those meetings: VRG Member Paul Barnes (by phone) Don Charles Frank Ciccotto (by phone) Michael DeLuke (by phone) Wallace Enman Anita Ford Greg Forsythe Carla Glass Gordon Goodman David Larsen Michael Mard Jerry Mehm Matthew Pinson Amy Ripepi Richard Stuart Affiliation Duff & Phelps Ernst & Young Standard and Poor s Houlihan, Lokey, Howard, & Zukin Moody s Investors Services Clifton Gunderson Deloitte Hill Schwartz Spilker Keller LLC Occidental Petroleum Duff & Phelps The Financial Valuation Group American Appraisal PricewaterhouseCoopers Financial Reporting Advisors McGladery & Pullen 1

2 Chris Thorne Gina Weaver (by phone) Brenna Wist Hilary Eastman International Valuation Standards Council Pfizer KPMG IASB Observing Organizations: SEC PCAOB AICPA Federal Reserve Board of Governors FASB Board Members Robert Herz, Chairman Thomas Linsmeier Leslie Seidman Marc Siegel Larry Smith FASB Staff Kristofer Anderson Eric Jourdan Adrian Mills Peter Proestakes Practice Fellow Postgraduate Technical Assistant Practice Fellow Assistant Director 2

3 Introductory Remarks 1. Mr. Anderson opened the meeting by providing an overview of the topics to be discussed: a. Issue : FASB/IASB s joint project on fair value measurement and disclosure b. Issue : Fair value measurement of leased investment properties c. Issue : Measurement of reacquired rights in a business combination d. Issue : Fair value measurement of accounts receivable, accounts payable, and other accrued liabilities. 2. Mr. Anderson stated that a member of the FASB staff would introduce each topic and summarize the discussions between VRG members and the FASB staff during the closed session and would note if the FASB staff observed any general agreement among VRG members regarding a particular issue. The topic then would be open for discussion following the introduction. Issue : FASB/IASB s Joint Project on Fair Value Measurement and Disclosure 3. Mr. Anderson stated that the VRG will discuss their questions or concerns relating to the Board s decisions in the FASB/IASB Fair Value Measurement and Disclosure project, including: a. Principal (or most advantageous market) b. Market participants c. Highest and best use and valuation premise d. Premiums and discounts e. Measurement uncertainty disclosure. Summary of Tentative Decisions Principal (or Most Advantageous Market) 4. Mr. Anderson stated that the changes made to the principal (or most advantageous market) guidance are intended to clarify that the principal market is the market with the greatest volume and level of activity for the asset or liability that the reporting entity has the ability 3

4 to access. Many VRG members raised concerns about the application of this requirement to a Level 3 fair value measurement, which does not transact on a market, but is still required to be measured at fair value. Mr. Anderson stated that this requirement, along with the presumption that the principal market is the market in which the entity normally transacts, was intended to clarify that entities would not need to perform an exhaustive search for markets that might have more activity than the market in which the entity normally transacts. 5. Mr. Linsmeier asked if the problems that VRG members are having was due to lack of guidance or a conflict in the guidance. Mr. Linsmeier stated that he thought the confusion was due to a lack of guidance because if no market exists for the entity to look to, the words ability to access would not apply. 6. One VRG member stated that the new language ability to access was confusing. The VRG member stated that entities know how to apply the reference market guidance, but was unsure if the new language would change current practice. 7. Ms. Eastman stated that the ability to access concept was included in Topic 820 under the guidance about Level 1 inputs. Ms. Eastman further stated that the IASB included the concept in the reference market guidance to clarify that entities did not need to perform an exhaustive search to identify all possible market prices. 8. One VRG member stated that there was some confusion about how to value an investment when the normal market for that investment was not active. The VRG member further stated that some entities would hypothesize the normal market in a later year when the market is thought to be active and then discount the value from that market back to the present day while other entities would look to a different market that was active for the investment. Market Participants 9. Mr. Anderson noted that VRG members raised concerns about the related party transactions guidance. Mr. Anderson stated that many VRG members were unsure how an entity could determine whether a transaction between related parties was executed at 4

5 market terms because if there was a market to reference, the entity would use that information when valuing the asset or liability. 10. Mr. Anderson stated that the IASB received comments on its fair value measurement exposure draft indicating that in some jurisdictions there are many transactions that occur between related parties, such as government-owned entities and entities with cross ownership. Mr. Anderson further stated that the guidance was necessary for those situations because information from transactions between related parties may be the only observable market data available to use in a fair value measurement. 11. One VRG member commented that the related party guidance included in Topic 820 may conflict with related party guidance already included in U.S. GAAP. Mr. Anderson stated that the staff would conduct further research to address this possible issue. 12. Ms. Seidman stated that the Board s intent for including the related party guidance was to clarify that it would be appropriate to take into account a transaction price that occurred between related parties as long as that transaction was entered into at market terms. Highest and Best Use and Valuation Premise 13. Mr. Anderson noted that VRG members discussed the Board s decision that the concepts of highest and best use and valuation premise only apply when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of liabilities or financial assets. There was no further discussion from meeting participants. 14. Mr. Anderson also noted that VRG members discussed the Board s decision to permit an exception to fair value measurement requirements when measuring the fair value of a group of financial instruments. VRG members discussed a few issues that could result from that decision. VRG members noted one issue that could result from that decision was in a circumstance when a nonfinancial asset or liability, such as a purchase agreement or a commodity contract, is grouped with financial instruments to measure the fair value of the group of assets and liabilities. Since the proposed guidance would specify that the exception could only be applied to financial assets and financial liabilities that are measured at fair value on a recurring basis, some VRG members questioned whether the criteria would allow these items to be grouped together under the proposed guidance. 5

6 Premiums and Discounts 15. Mr. Anderson stated that there was significant discussion by VRG members about the application of premiums and discounts in a fair value measurement. Mr. Anderson noted that some VRG members discussed concerns about determining the appropriate unit of account for measurement because Topic 820 or other U.S. GAAP may not explicitly address the unit of account for a particular asset or liability. Mr. Anderson stated that there was some concern expressed about the prohibition of a blockage factor in all levels of the fair value hierarchy because some entities, for example broker-dealers, often transact in blocks and do incur a blockage factor. 16. Mr. Herz stated that he has heard various concerns surrounding the prohibition of blockage factors. Mr. Herz stated that the first concern he has heard is that some entities believe they should be able to apply a blockage for securities categorized in Level 1 of the fair value hierarchy. Mr. Herz stated that another concern he has heard relates to confusion about the appropriate unit of account for Level 2 and Level 3 fair value measurements. 17. Mr. Anderson stated that the following example has caused some concern: An investment company holds a controlling interest in a privately held company and the investment must be remeasured at fair value on a recurring basis. Mr. Anderson stated that there have been concerns about whether the investment company would value the investment in its entirety, which would take into account a control premium or if the investment should be valued at the individual share level, which would ignore any control premium. 18. One VRG member stated that there were concerns about how to define a blockage discount. The VRG member stated that it was difficult to define a blockage factor as being distinct from other types of valuation adjustments, such as liquidity and marketability issues. 19. Mr. Linsmeier stated that a liquidity and marketability discount is distinct from a blockage factor because the liquidity and marketability discounts are a feature of the market at a particular time, while a blockage discount is due to an entity s intent and is not market driven. 6

7 20. Ms. Seidman summarized the discussion from her perspective, stating that most VRG members suggested that the Board should not provide additional guidance on blockage factors other than the guidance that is already included in Topic 820. VRG members also do not want the Board to address unit of account and unit of valuation issues within this project, but rather those issues should be addressed in each individual standard. Measurement Uncertainty Disclosure 21. Mr. Anderson stated that in the closed session, the staff explained that the objective of the measurement uncertainty disclosure is to provide information to users of financial statements about the relative degree of subjectivity in fair value measurements categorized within Level 3 of the fair value hierarchy. Mr. Anderson stated that some VRG members expressed concerns about the operationality of the proposed disclosure. There was no further discussion from meeting participants. Issue : Fair value measurement of leased investment properties 22. Mr. Mills summarized the discussion from the closed session about the FASB s new project on investment properties as follows: a. VRG members stated that U.S. GAAP requires separate recognition of a property and the above or below market portion of any lease in a business combination. VRG members generally stated that the fair value of the building is measured assuming it is empty and then the above or below market portion of the leases is considered separately. Some VRG members stated that they have observed diversity in practice as to whether the above or below market portion of a lease is recognized. Some VRG members suggested that the Board should consider whether entities should separately present any above or below market lease. 23. Mr. Smith asked VRG members how they would value a building as an investment property. One VRG member stated that they would evaluate the current rent payments received, class of property, tenants and length of lease agreements to estimate the cash flow of the property. 24. Mr. Smith asked VRG members how they would account for the following situation: 7

8 An entity owned a building and held long-term leases with its tenants. The entity valued the property on day 1 when all of the leases were at market terms. Five years later, the entity needed to evaluate the building for impairment. How would the entity do this? 25. A VRG member stated that they believe current practice is to look at the fair value of the real estate separate and apart from the leases because the asset recorded on the financial statements is the building itself. Other VRG members stated that they would evaluate the building as a cash generating unit and evaluate the building on a cash flow basis using the current rent payments received, length of leases, and other factors relevant to estimate the cash flows. Issue : Measurement of reacquired rights in a business combination 26. Mr. Anderson summarized the discussion from the closed session on the measurement of a reacquired right in a business combination as follows: a. The majority of VRG members stated that the reacquired right should be measured based on a valuation technique that considers the franchisee s (that is, the acquiree) cash flows after payment of an at-market royalty rate to the franchisor (that is, the acquirer). Therefore, an entity should look at the cash flows that the franchisee generates above and beyond the at-market royalty rate paid under the agreement. b. Some VRG members questioned if recognizing the reacquired right in a business combination is appropriate in all circumstances. Other VRG members had further questions about subsequent impairment testing. Members questioned if reacquired rights should be revalued when performing a goodwill impairment test. 27. Ms. Seidman stated that the problem was that entities would potentially recognize an internally generated intangible asset. Issue : Fair value measurement of accounts receivable, accounts payable, and other accrued liabilities 28. Mr. Anderson summarized the discussion from the closed session about the appropriate approach to measure the fair value of accounts receivable, accounts payable, and other accrued liabilities as follows: 8

9 a. VRG members stated that current practice when acquiring account receivables, accounts payables, and other accrued liabilities in a business combination is to look at the carrying amount of the accounts receivables and accounts payable assessing them for collectability, credit, and reserves. b. One VRG member stated that typically when a business is acquired, the agreement includes a set amount of working capital to ensure the business can continue as an ongoing business. When applying an in-use valuation premise, the fair value measurement assumes that the highest and best use of the accounts receivable, accounts payable, and other accrued liabilities acquired would be included within a reporting entity s ongoing business operations as the unit of valuation. c. Some VRG members stated that a consequence of the Board s decision to only allow the in-use premise for nonfinancial assets would change prevailing practice for measuring the fair value of accounts receivable, accounts payable, and other working capital items. VRG members stated that these types of assets and liabilities are often used in combination and to force entities to report otherwise would not represent the economics of the business combination. 29. Some VRG members questioned the consequences of each approach presented for valuing the accounts receivables, accounts payables, and other accrued liabilities included in the meeting handout. Mr. Anderson stated that in the factoring scenario, the difference between the carrying value and fair value would be recognized in goodwill and recognized in earnings over time, assuming they are collectible. 30. Mr. Herz questioned if an entity would incorporate nonperformance risk or credit risk in the measurement. Mr. Anderson stated that the example assumed that the discount rate included those items. 31. Ms. Seidman stated that this issue arose because of the valuation on day 1 in a business combination. However, in the Board s project on accounting for financial instruments, the Board decided to measure most financial instruments at fair value on an on-going basis. Ms. Seidman questioned if it was correct to provide an exception for these instruments. Mr. Anderson stated that this was something the Board would need to consider, because in current U.S. GAAP, on day 1, the instruments acquired in a business combination would 9

10 need to be recognized at fair value, but on day 2 those instruments may be reported at carrying value. Additional Issues 32. Mr. Herz asked VRG members to provide an update on the state of the valuation profession in the United States and internationally, including valuation standards, professional qualifications, and other infrastructure issues. 33. One VRG member stated that the IVSC is gaining increased support from accounting firms and other constituents and is continuing its project to simplify and improve valuation standards. In addition, the IVSC and other valuation organizations are developing valuation best practices application guidance for topics such as: contributory asset charges, customer related assets, and control premiums. 34. VRG members stated that there is also significant progress being made to incorporate credentialing and other educational requirements into the valuation profession. Adjournment 35. Mr. Anderson thanked members of the VRG for sharing their insights with the Board. The meeting was then adjourned. 10