When valuing life insurance or life insurance-linked instruments such as split-dollar collateral assignment receivables or split-dollar promissory notes, the three elements of Fair Market Value are: (1) the illustrations from the insurance company projecting expenses, premiums, and cash values, (2) the mortality rates applicable to the insured life as of the valuation date, and (3) the discount rates applicable to the cash flows from the policy as of any given year. This section discusses mortality estimates.
The Black-Scholes model is in widespread use among reporting entities and accountants - even though research shows, and most people realize, that the model overvalues illiquid instruments. This white paper argues that current fair value accounting rules require consideration of factors (e.g., liquidity) which Black-Scholes was never designed to consider, and cannot consider. An approach that adjusts valuations for liquidity is more appropriate and accurate. This applies to any fair value measurement subject to the principles of FAS 157, including valuations of warrants, options, and embedded derivatives like optionality or conversion options.
In Gallagher v. Commissioner, not only did the Internal Revenue Service lose badly, but it did so even with seemingly very good facts and past Tax Court opinions both on its side. It was not a great day in court for the government – in fact, it would have been better off not even picking the tax return up for audit. The Court’s concluded value was lower than the value claimed on the estate tax return.
The case is a must-read for anyone interested in current Tax Court thinking on valuation issues, particularly on the applicability of the market approach and the minute details of how to apply the income approach to a business valuation. Gallagher also further solidifies the Court’s position on the treatment of the tax obligations of investors in pass-through entities.
Valuation discounts are frequently challenged by the Internal Revenue Service and no discount is as contentious as the marketability discount. Usually the largest valuation adjustment in an appraisal and often poorly supported, it presents an inviting target. A recently published document presents research, analysis, and conclusions from professionals at the Service on this topic. The goal of this paper is to review the Service's main findings and add our own analysis and perspective. As we will explain further below, the document covers virtually every method or piece of research proposed to handle marketability discounts. And it makes in places sweeping conclusions regarding well-known and widely used methods. Read on to see how these finding may impact your clients.
A review of SEC filings is about as welcome as an IRS audit but occurs with greater frequency and predictability. Every public company has its filings with the Securities and Exchange
Commission (SEC) scrutinized at least once every three years. As the SEC reviews company filings, whether on a routine or selective basis, it often issues a comment letter to which
the recipient company must respond post haste. Want to understand how the SEC review process works and what to expect if your company receives a comment letter? Read on.
Since the February 2008 “freeze” in the Auction Rate Securities (ARS) market, public and private companies, their auditors, and their valuation advisors have struggled to determine the fair value of these now-illiquid assets.
Reputational and career damage aside, what is the monetary penalty for failing to obtain a third-party valuation on two illiquid private equity investments? The answer is $1 million. Brantley Capital Management recently paid this amount to settle SEC charges that the firm overvalued investments in order to charge higher investment advisory fees.
Studies of restricted securities private placements have explained the difference between the price of stocks sold to private investors and the issuer's contemporaneous stock price in the market with factors such as the information asymmetry between issuer management and buyers, the possible impending financial distress of the issuer, or control and monitoring services provided by the buyers.