For a variety of reasons, the acquisition of medical practices by hospitals has become more attractive in recent years. The volume of acquisitions is increasing steadily and therefore physicians and their advisors need to understand the valuation process which drives the purchase price.
There are times in our lives we each look back upon and say “if only I had”. For many of us those times seem to be focused on events (or non-events) such as “if only I had invested in Microsoft in 1992”, or “if only I had sold my house in 2006.” In terms of estate planning that involves the transfer of ownership interests, we are experiencing a time that will become one of the “if only” times for those who do not act now.
There have been some recent changes to the ever-complicated rules governing goodwill, fair value, impairment testing. Previously, an entity which recorded goodwill as part of a transaction was required to test the goodwill for impairment at least annually. The test consists of two parts, the first of which is comparing the current fair value of the reporting unit, in which the goodwill is recorded, to the carrying value of the reporting unit. This step requires the valuation of the reporting unit.
ASC 820 – Fair Value Measurements and Disclosures sets forth the definition of Fair Value as “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. Paramount to the definition is the concept of the “market Participant”. The Market Participant is further defined in ASC 820 as “…buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
We’re often asked about the most interesting valuation issues we’ve encountered. This is difficult to answer because each valuation has unique intricacies and difficulties. While some share similarities, no two are identical. Still, a few stand out as presenting unique valuation issues. We recently worked on one such project.
The year started with a proverbial “BANG” from an estate planning perspective with the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 late last year. The Act, as some have named TRUJCA, could almost just as easily been titled “Estate Tax Repeal.” Regardless of the name, the new rules certainly have people talking about the numerous planning opportunities it affords, although those may be temporary.
Increasing numbers of businesses are turning to the U.S. Bankruptcy Code for economic survival.
Bankruptcy filings for the year ending June 30, 2010 were 20% higher than the previous year-to-year period ending June 30, 2009. Clearly, the difficult economy is taking its toll on individuals and businesses. Chapter 11 bankruptcies alone increased two percent within that same time span. To complete the Chapter 11 process, a business must submit a reorganization plan for court approval. For a company to emerge from Chapter 11, a host of issues must be addressed, including a determination of its “reorganization value.”
Virtually all investments lost value during 2008, and 2009 did not herald the end of the recession, or begin the economic recovery, that many hoped would occur. Appetites for taking risk, including the risk of potential tax audits associated with complex estate planning, have remained restrained. However, recent tax court decisions could re-ignite interest in utilizing Family Limited Partnerships (FLPs) or similar entities as part of asset protection and estate planning.
Over the past twelve to eighteen months, we have heard considerable discussion about how the economic downturn has affected valuations of private companies. All of us who have 401ks understand the volatility of public company valuations. Private company values have been affected similarly. However, some valuation professionals have instituted the “smoothing” method to lessen the market volatility on business valuations.
I recently wrote about one of the most dramatic changes since the inception of the fair value concept for financial reporting imposed by Statement of Financial Accounting Standards No. 157 (“FAS 157”). Nearly a year since the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, accounting standards have been codified and the nomenclature used when referring to FASB statements has changed. FASB Statement No. 157 is now encompassed in Accounting Standards Codification (“ASC”) 820.
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