The New Valuation Regulations. May 25, 2017

Transcription

1 The New Valuation Regulations May 25, 2017

2 Agenda Overview Overview of the New Valuation Regulatory Framework MPF Impact on the Valuation Process for Alternative Investment Managers Questions Expectations of Investors, Regulators & Auditors 2

3 Today s Presenters Chris Franzek Ross Hostetter David Larsen 3

4 Dedicated to Delivering Value 4

5 More Than 70 Offices and Affiliates Worldwide 5

6 Powering Sound Decisions 6

7 Enhancing Value Across a Range of Expertise 7

8 Regulatory Affiliations 8

9 Portfolio Valuation Advisory Services assists clients with design and implementation of best-in-class valuation policies and processes, including on-going review of valuation procedures and conclusions to ensure best practices. Market Leader We review over 5,000 illiquid investment positions with an aggregate value of approximately $225 billion on a quarterly basis. Our client base consists of over 350 alternative asset fund managers and investors, including: 80% of the 10 largest private equity firms 40% of the 50 largest hedge funds 70% of the 10 largest BDCs Investors ranging from small family offices to large public pension funds Thought Leader We are at the forefront of the industry s leading committees on valuation processes, guidelines, and regulations: IPEV Vice Chair ILPA Special Advisor AICPA PE/VC Valuation Guide Task Force Member FASB Valuation Resource Group Member Managed Funds Association Sustaining Member Leadership on drafting IPEV and PEIGG private equity valuation guidelines Development of Created Value Attribution Framework 9

10 Overview The New Valuation Regulatory Framework

11 The New Valuation Regulatory Framework New Credential: CEIV (Certified in Entity and Intangible Valuation) New Framework: MPF and APPLICATION of the MPF MPF - Mandatory Performance Framework APPLICATION - Application of the Mandatory Performance Framework 11

12 How did we get here? - The SEC Speaks Out Scott Taub Comments are interpreted as being critical of the valuation profession. Paul Beswick Suggests that the valuation profession is fragmented and inconsistent, and would benefit from unified qualifications, standards and oversight Paul Beswick Provides some hopeful remarks about increased dialogue in the valuation profession, although suggests that much remains to be done. Steering Committee AITF Forum, valuations for financial reporting (VFR) Appraisal Foundation Begins sponsoring Valuation Advisories, adds to AICPA Guides Appraisal Practices Board Formed FV Quality Initiative Formed 1 st of 3 Bus. Valuation Roundtables 12

13 Industry Response - Fair Value Quality Initiative Group Forms Address issues brought up by regulators. Big 4 valuation leaders and representatives of Valuation Professional Organizations ( VPOs ) comprise this group. Others invited include the CFA Institute, The Appraisal Foundation, the IVSC, and midsized accounting firm valuation leaders. SEC Meeting Group Leaders meet with Paul Beswick, Chief Accountant of the SEC, in the Spring to discuss the path forward. Formal Meetings Begin Regularly meetings begin in the Spring/Summer; four work streams were identified and populated Progress Meetings were held with the SEC staff, PCAOB staff and the FASB Board and staff 13

14 Industry Response - Fair Value Quality Initiative (continued) Interested Party Meetings Additional meetings with interested parties, the Governance and the Mandatory Performance Framework work stream occurred in early 2016; referred to as the friends & family meetings. MPF issued 1/17 VPOs have been vetted; VPO Training and the CEIV Credential exam are in place. 3/2016 5/2016 8/2016 9/16-Today Mandatory Performance Framework The Mandatory Performance Framework work stream issued a draft for comment. Comment period ended 8/24. Assessment A subgroup of the Mandatory Performance Framework and the Qualifications work streams, comprised of a technical writer and an experienced exam writer from each VPO developed the initial assessment 14

15 New Requirements CEIV Intended for professionals who perform fair value measurements for public company financial statement reporting purposes. Includes mandatory performance requirements. CEIVs will be required to meet rigorous qualifications and ongoing education and credential maintenance requirements. MPF & APPLICATION Applicable to estimating the fair value of a business, business interest, intangible asset, certain liabilities, or inventory Designed for use by all valuation professionals. CEIV credential holders are required to adhere to the MPF documents. Adhering to the MPF documents is considered best practice by valuation professionals who do not have the CEIV credential and who perform valuation of a business, [or] business interest, used to support management assertions made in financial statements issued for financial reporting purposes (all US GAAP financial statements). 15

16 Mandatory Performance Framework and the Application of the MPF (2 Documents) Mandatory Performance Framework Section 1: Preamble Section 2: Valuation Engagement Guidance Section 3: Glossary Section 4: Authoritative and Technical Guidance Application of the MPF Section 1: General Valuation Guidance Section 2: Business Valuation Guidance Section 3: Valuation of assets and liabilities Guidance 16

17 Why should you care about the new framework? MPF is now considered best practice for: All Valuation Professionals Whether or not they have the CEIV credential (MPF required for CEIVs) For all fair value estimates of Businesses and Business Interests prepared in compliance with US GAAP (public or private) Implication (over time): Auditors will evaluate a Fund s / Manager s Valuation Internal Controls to determine if they are consistent with the MPF Auditors will expect a Fund Manager s Fair Value measurements to be derived and documented consistent with the MPF Regulators (SEC/PCAOB) will expect Valuation Professionals (external and possibly internal) to have the CEIV credential Investors will expect Fund Managers to comply with the MPF and have a CEIV credential holder (internal or external) involved in the Valuation process 17

18 When is the new Framework Applicable? MPF is live there was no effective date. The MPF is effective now! CEIV Credential Requirements have been published CEIV Prerequisite Training Courses are available CEIV Examination is available 18

19 CEIV A Two Phase Process VPO Phase Obtain a VPO credential (ASA, ABV, MRICS), or Use VPO pathway to obtain the CEIV a VPO equivalent; or Qualifying exams (e.g. CFA) can be used as a substitute for the VPO exam CEIV Phase Complete VPO prerequisites; Complete 4 online courses; CEIV exam on FVM environment, guidance and related auditing requirements and MPF; 3,000 hours performing FVMs in preceding 5 years Continuing education, experience and compliance requirements See: and Appendix for expanded discussion on obtaining CEIV credential 19

20 Impact On the Valuation Process for Alternative Investment Managers

21 MPF Applicable for all US GAAP Fair Value Measurements of Businesses and Business Interests How to? Valuation profession develops technical standards and guidance Who is to do? VPOs have increased their focus on providing training, accreditation, technical guidance, and frameworks for ethical conduct How much to do? Mandatory Performance Framework establishes a minimum threshold for how much valuation professionals must do 21

22 Mandatory Performance Framework How much work should be performed in order to design, implement and conduct a valuation analysis? Scope of work Extent of documentation and analysis Consideration of contrary evidence Documentation in both the report and the supporting working papers. Establishes the extent to which valuation professionals perform their work in terms of depth of analysis and documentation 22

23 MPF 1. Preamble: Goal and Purpose Primary Goal How much work is to be performed Documentation requirements Primary Purpose Promote quality, consistency and auditability Set minimum scope of work and documentation requirements NOT intended to Address valuation theory Be a how-to guide on valuation 23

24 Extent of Documentation Requirements An experienced professional must be able to: Understand: Purpose, nature, extent, and results of the procedures performed. All approaches and methods used and why commonly used approaches and methods were not used (if applicable). Inputs, judgments, and assumptions made and why they were used. Determine who performed the work and their qualifications. Identify: Intended users of the fair value measurement. Sources and supporting data for inputs, judgments, and assumptions. Measurement date. 24

25 Documentation Evidence that the valuation was completed in accordance with the MPF Paper, electronic files, or other forms of recorded media Source documents company sources and external third-party data evidential support to an input, process, or output required to arrive at a conclusion of value (ID of source documents and selection criteria OK for large files such as 10K s) contrary evidence to the conclusion of value, with an explanation of how this information was considered, should be included in the final valuation report 25

26 Documentation (continued) Analysis documents Computational Analysis: Numerical analysis performed: exhibits, schedules, and working papers. Evidential support (or contradictory indications) to an input, process, or output. Demonstrates what we did and how we did it. Narrative-based Documents: Complement the computational analyses by explaining why we selected certain methods, inputs, and judgments made regarding valuation assumptions. Includes report narrative, footnotes and memos to the work file or other narratives that document and explain our reasoning. 26

27 Professional Skepticism An attitude that includes a questioning mind and critical assessment of valuation evidence Evidential skepticism. Question and critique all information and data with the appropriate level of skepticism considering the potential for bias within the information and data. Must consider the experience of management and the sufficiency of the documentation and analyses provided by management. The valuation professional should not presume management is biased; however, the valuation professional should not accept and rely on less-than-persuasive evidence because the valuation professional believes management is unbiased. Self-skepticism. Monitor own client-based presuppositions that could detract from evidencing skepticism as a result of comfort level or familiarity with the client, industry, or both. 27

28 Application of the MPF 28

29 Application of the MPF General Valuation Guidance; Business Valuation Guidance; and Valuation of Assets and Liabilities Guidance Specifically, these sections address matters that need: Greater consistency in the application of valuation approaches and methods, Support for issues that require the application of professional judgment, and Documentation of inputs. 29

30 Application of MPF Topics General Valuation Guidance Fair value measurement Selection of valuation approaches and methods Prospective financial information Business Valuation Guidance 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 30

31 Prospective Financial Information (PFI) Must review the PFI with the appropriate level of professional skepticism PFI is any financial information about the future Common Categories Break-even analyses Feasibility studies Forecasts, or Projections Commonly Prepared for: External financing Budgetary purposes, or Calculating the expected return on investments 31

32 Is PFI provided by management representative of expected value and properly supported? Determine the most appropriate way to align PFI and expected value PFI a) Management revises its PFI b) Adjust assumptions in PFI c) Use another PV method (e.g. DRAT or EPVT), or d) Use a different approach Expected Value not an all-inclusive list 32

33 Understand Management s Approach to Developing the PFI Prepared by one or more members of management or an internal functional group; A top-down or a bottom-up method or some combination of the two used; Be aware of the purpose for which the PFI was prepared; Market participant assumptions; Goal: objective, reasonable, and supportable PFI; Management bias may exist, if present, properly adjust PFI to expected cash flows. 33

34 Factors and common procedures to consider Comparison of PFI for an underlying asset of subject entity to expected values of the entity cash flows; Frequency of preparation; Comparison of prior forecasts with actual results; Mathematical and logic check; Comparison of entity PFI to historical trends; Comparison to industry expectations; Check for internal consistency. 34

35 Expectations Of Investors, Regulators & Auditors

36 PCAOB Expected New Audit Standards In 2014 and 2015 the PCAOB issued consultation papers for public comment on the topics of: The Auditor s Use of the Work of Specialists Auditing Accounting Estimates and Fair Value Measurement After considering public comments on the consultation papers, the PCAOB has combined the topics and soon expects to release proposed new audit standards which focus on auditing fair value measurements. 36

37 Impact of the New Framework! Implication (over time): Auditors will evaluate a Fund s / Manager s Valuation Internal Controls to determine if they are consistent with the MPF Auditors will expect a Fund Manager s Fair Value measurements to be derived and documented consistent with the MPF Regulators (SEC/PCAOB) will expect Valuation Professionals (external and possibly internal) to have the CEIV credential Investors will expect Fund Managers to comply with the MPF and have a CEIV credential holder (internal or external) involved in the Valuation process 37

38 Our Recommendations Read & Understand the MPF & APPLICATION Begin discussions with your valuation advisor and your auditors about how you will implement the MPF & APPLICATION Consider the extent to which you may need to enhance your documentation practices, especially with respect to PFI Consider the extent to which you should engage the services of a CEIV credential holder (Internal and/or External) Prepare for questions from Investors as to your compliance with the MPF 38

39 Questions? Contact Us Chris Franzek Ross Hostetter David Larsen

40 Chris Franzek Managing Director, Alternative Asset Advisory Chris Franzek is a managing director in the New York office and part of the Valuation Advisory Services business unit. He has more than 15 years of financial and valuation experience. Chris specializes in the valuation of illiquid securities for hedge funds, private equity funds, business development corporations and fund of funds. He has performed valuations of some of the largest and most complex portfolios of private loans, private equity interests, real estate and derivative securities. Chris hedge fund experience includes performing quarterly analyses of private loans, private equity and real estate positions, and various derivative securities. His private equity experience includes the valuation of private equity investments as well as limited partnership (LP) interests, including four of the largest private equity LP-backed collateralized fund obligations to date. Chris also has extensive experience valuing private equity investments and portfolios, having analyzed over 3,000 private equity portfolio companies in the past five years., LLC New York Chris.Franzek@duffandphelps.com Chris has performed a variety of valuations and decision support analyses for both public and private companies across many industries including the consumer products, apparel, chemicals, energy, hospitality/gaming, healthcare, industrial products, internet, pharmaceutical, publishing, retail and telecommunications industries. He also performed valuations of portfolio companies in connection with purchase price allocations under IFRS 3: Business Combinations and SFAS 141: Business Combinations and Intangible Assets and option pricing. Prior to joining, Chris was a senior manager at BearingPoint, Inc. where he led their New York Valuation and Financial Advisory Services Practice. Chris received his M.B.A. in finance from Cornell University s Johnson Graduate School of Management and his B.A. in economics from the University of Rochester. He is also a senior member of the American Society of Appraisers. 40

41 Ross Hostetter Managing Director, Alternative Asset Advisory Ross Hostetter is a managing director in the New York office and part of the Portfolio Valuation service line. Ross has more than 20 years of experience serving clients across the financial services industry. Ross works primarily with private equity funds, hedge funds, and business development companies. He has extensive experience both in valuing illiquid securities and in establishing best in class valuation policies and procedures. He has valued illiquid securities across capital structures, industries, and geographies and has performed business valuations and intangible asset valuations for a diverse range of companies., LLC New York ross.hostetter@duffandphelps.com Prior to, Ross was a director at Standard & Poor s Corporate Value Consulting (CVC). Prior to CVC, Ross worked at PricewaterhouseCoopers (PwC) as a tax associate in the PwC Charlotte office for three years, where he advised on federal and state corporate tax issues, and in the London office as a tax manager. While working with the Banking and Capital Markets group in London, Ross focused on advising financial services clients on U.K. corporate tax and international tax issues. Ross received his undergraduate degree from the University of Georgia and his MTx from Georgia State University. 41

42 David L. Larsen, CPA, CGMA, CEIV Managing Director, Alternative Asset Advisory David Larsen is a managing director in the San Francisco office of and part of the Portfolio Valuation service line. He has more than 30 years of transaction and accounting experience. He specializes in fair value accounting issues, and specifically in valuation, accounting, and regulatory issues faced by Alternative Asset managers and investors., LLC San Francisco David.Larsen@duffandphelps.com David advises leading Private Equity Managers and Institutional Investors and has advised numerous strategic and private equity acquirers in all areas of mergers, acquisitions, joint ventures, divestitures and valuation related maters. He provides valuation policy and process assistance to a number of the world s largest institutional limited partner investors and some of the world s largest alternative Investment managers. David serves as Vice Chair of the International Private Equity and Venture Capital Valuations Board (IPEV), which in 2015 released updated International Private Equity Valuation Guidelines and serves as a member of the American Institute of Certified Public Accountants (AICPA) PE/VC Practice Guide Task Force. David has served as a special advisor to the Institutional Limited Partners Association; board member, project manager and technical advisor to the Private Equity Industry Guidelines Group and was instrumental in developing and drafting the Private Equity Industry Guidelines Group s Valuation and Reporting Guidelines; member of the Financial Accounting Standards Board s Valuation Resource Group responsible for providing the Board with input on potential clarifying guidance on issues relating to the application of the principles of FASB ASC Topic 820 (formerly SFAS No. 157), Fair Value Measurements and a member of the AICPA Net Asset Value Task Force. Prior to joining, David was a Partner in KPMG LLP s Transaction Services practice, where he was the segment leader of KPMG s U.S. Institutional Investor practice. He served 13 years in KPMG s Seattle, Düsseldorf and Prague audit practices prior to moving full time to advisory work. David received his M.S. in accounting from Brigham Young University s Marriott School, his B.S. in accounting from Brigham Young University. He is a certified public accountant licensed in California and Washington. David is also a member of the AICPA and the California and Washington Society of Certified Public Accountants and is a FINRA Series 7, 24 and 63 registered representative. 42

43 Appendix Additional Information Resources CEIV A Two Phase Process VPO Phase Overview Qualifying Exams ASA Pathway AICPA Pathway (Non-CPAs) AICPA Pathway (CPAs) RICS Pathway CEIV Phase Education, Exam and Experience CEIV Credential Maintenance 43

44 Resources White Paper: CEIV: AICPA: Pages/CEIV-pathway-tool.aspx ASA: RICS: 44

45 CEIV A Two Phase Process VPO Phase Obtain a VPO credential (ASA, ABV, MRICS), or Use VPO pathway to obtain the CEIV a VPO equivalent; or Qualifying exams (e.g. CFA) can be used as a substitute for the VPO exam CEIV Phase Complete VPO prerequisites; Complete 4 online courses; CEIV exam on FVM environment, guidance and related auditing requirements and MPF; 3,000 hours performing FVMs in preceding 5 years Continuing education, experience and compliance requirements See: and Appendix for expanded discussion on obtaining CEIV credential 45

46 VPO Phase - Overview ASA AICPA Course Requirements VPO Exam (or a qualifying exam) Report BV or Challenge Exam Required for USPAP & Ethics ASA; not for CEIV path CPA - None Non-CPA - Code of Professional Conduct - Valuation and Consulting Standards (SSVS1) ABV AICPA Valuation Principals Exam None Valuation Experience & CPE 5 years of experience; no CPE 3,000+ hours of experience and 75 CPE over last 5 years RICS see following slide for details 46

47 Qualifying Exams Accredited in Business Valuation (ABV) Exam AICPA Valuation Principals Exam Accredited Senior Appraiser (ASA) BV Exams or Challenge Exam Royal Institute of Chartered Surveyors (RICS) Oral Assessment Chartered Financial Analyst (CFA) level III Chartered Business Valuator (CBV) 47

48 ASA Pathway ASA credential holders go directly to CEIV Phase New ASA applicants: Exam Challenge exam study materials will be distributed Exam alternative is to complete BV Pass a qualifying exam (CFA, ABV, CBV, etc.) Courses USPAP course and assessment (2-day online version) Ethics course and assessment (4 hour online version) Report A report must be submitted to obtain the ASA certification Can by-pass report submission for CEIV pathway (no ASA) Experience 5 years of valuation experience 48

49 AICPA Pathway Non-CPAs The AICPA provides a pathway to the CEIV for non-cpa s: Exam AICPA Valuation Principles Exam: Module 1 Approaches; Module 2 - Analysis & Related (similar to ABV exam) Pass a qualifying exam (CFA, ABV, CBV, etc.) Courses Code of Professional Conduct Valuation and Consulting Standards (SSVS1) CPE 75 hours of valuation-related continuing professional education (CPE) during the preceding 5-year period Experience Minimum of either six business valuation engagements or 150 hours of BV experience in preceding 5-year period 49

50 AICPA Pathway CPAs CPA s would obtain the ABV certification: Exam ABV Exam: Module 1 Approaches; Module 2 - Analysis & Related Pass a qualifying exam (CFA, ABV, CBV, etc.) CPE 75 hours of valuation-related continuing professional education (CPE) during the preceding 5-year period Experience Minimum of either six business valuation engagements or 150 hours of BV experience in preceding 5-year period 50

51 51

52 CEIV Phase - Education Accounting Standards and Regulatory Environment Applicable standards from the FASB Accounting Standards Codification, differences between U.S. GAAP and IFRS, and SEC and PCAOB guidance. Fair Value Technical Guidance and Other Related Topics Common approaches and methods; business and intangible asset valuation; contingent consideration and other contingencies; and useful life analysis. Auditing Considerations Auditing process (including AICPA and PCAOB auditing standards) related to valuation reports; reliability and testing management s assumptions; and auditing accounting estimates and fair value measurements. Mandatory Performance Framework The MPF is a practical non-authoritative framework defining "how much" work is necessary to provide supportable and auditable FVMs. Course reviews the documentation and performance requirements in the MPF. 52

53 CEIV Phase - Exam Two-part online multiple choice exam based on the fair value measurement concepts covered in the CEIV education: Accounting and Regulatory Environment Technical Guidance Audit Considerations MPF and its related applications. 53

54 CEIV Phase - Experience 3,000 hours performing Fair Value Measurements (FVMs) in the 5 years preceding application, and may include: Performing, mentoring, supervising or managing FVM engagements Firm review of FVMs prepared by the firm s valuation team; Signing valuation reports; Consulting on, instructing, authoring, and developing thought leadership and staff development on FVM matters Auditor specialist valuation reviews of FVMs prepared by a third party or by management; 54

55 CEIV Credential Maintenance Education / Training 8 hour annual Fair Value update offered by approved VPOs 48 hours of Fair Value-specific education every 3 years Ongoing Business Experience 1,500 hours performing Fair Value Measurements every 3 years Compliance Requirements Mandatory Performance Framework Annual Engagement Level Quality Review 55

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