The Securities and Exchange Commission expressed concern about the broadening application of fair value and fair value-based measurements in U.S. GAAP, and it has indicated that the valuation profession should establish a uniform set of qualifications, training, accreditation and oversight. As a result, the Association of International Certified Professional Accountants (“AICPA”), American Society of Appraisers (“ASA”) and Royal Institute of Chartered Surveyors (“RICS”) worked together and created the Mandatory Performance Framework (“MPF”) and the Certified in Entity and Intangible Valuations (“CEIV”) designation, which was launched for qualified business appraisers in mid-2017. CEIV credential holders must adhere to the MPF. Even though valuation professionals with the CEIV credential are the only ones required to adhere to the MPF, the MPF should be considered best practice by valuation professionals who perform valuations that are used to support management assertions made in financial statements issued for financial reporting purposes.
The MPF is broken down into two documents. The first document outlines the general process including a discussion of relevant standards, the scope of the MPF, professional competence and skepticism, review of valuation reports and a glossary of terms. The second document focuses on the application of the MPF (“AMPF”), specifically procedures and documentation requirements. The AMPF provides guidance for (I) General Valuation, (II) Business Valuation and (III) Intangible Asset, Certain Liabilities, and Inventory.
1. General Valuation Guidance
This section of the AMPF focuses on the fundamentals of fair value, specifically Fair Value Measurement (“FVM”), selection of valuation approaches and methods and Prospective Financial Information (“PFI”).
- FVM: A valuation professional must evaluate and document assessment of fair value at the initial transaction date (if applicable) and subsequent measurement dates. In addition, a valuation professional must analyze and record management’s selection of calibrated inputs and the rationale for any changes in valuation methods used for subsequent measurement dates.
- Valuation Approaches and Methods: A valuation professional must document the process and rationale for the selection and weights of valuation approaches as well as a reconciliation of the results.
- PFI: Valuation professional must assess the quality and reliability of PFI. The assessment of PFI may include, but not be limited to, a comparison of PFI to prior forecasts, historical trends and industry expectations. The MPF requires documentation of who prepared the PFI, the process used to develop the PFI, explanation of key underlying assumptions, the valuation professional’s steps used to test reasonableness, evidence of any contradictory assumptions, evidence that a mathematical check was performed and the rationale for any adjustments.
2. Business Valuation Guidance
The second section of the AMPF lays out the requirements that govern the scope of work that a valuation professional must consider when performing this type of assignment as well as the extent of documentation. The specific topics covered are:
- discount rate derivation
- growth rates
- terminal value multiple methods and models
- selection of and adjustments to valuation multiples
- selection of guideline public companies or guideline company transactions
- discounts and premiums.
3. Intangible Asset, Certain Liabilities and Inventory Guidance
The last section of the AMPF focuses on intangible assets, contract liabilities and inventory. Intangible assets are typically valued as part of a business combination or impairment analysis. Common intangible assets include tradenames, customer relationships, backlog and contracts and technology. The AMPF covers significant topics, including the outlining the procedures and documentation requirements, related to these types of valuations, specifically:
- identification of assets and liabilities
- operating rights
- life for projection period
- customer-related intangible assets
- royalty rates
- contributory asset charges
- tax amortization benefit
- discount rates including the IRR and WARA
- reconciliation of intangible asset values
- contract liabilities and inventory.
The CEIV designation and the MPF will result in more consistent, higher quality and better documented valuation engagements for financial reporting purposes, which will result in supportable and auditable fair value measurements.
For more information about the CEIV and the MPF, visit www.ceiv-credential.org.