Background of CEIV Credential September 6 and 7, 2017

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1 Background of CEIV Credential September 6 and 7, 2017 Eversheds Sutherland BDC Roundtable 2017

2 Background of CEIV - Fair Value Quality Initiative The SEC has expressed a desire that the various stakeholders in the valuation profession coordinate their efforts to establish rigorous and uniform qualifications, training, accreditation, and oversight of individuals conducting fair value measurements for financial reporting purposes for SECregistered U.S. public companies. Therefore, in response to the SEC s comments along with increased fair value scrutiny by the PCAOB, meetings were held with the SEC staff, PCAOB staff and the FASB Board and staff in In addition, several non-profit valuation professional organizations (VPOs), Big 4 valuation leaders, along with representatives from the CFA Institute, The Appraisal Foundation, the IVSC (International Valuation Standards Council) and mid-size accounting firm valuation leaders were part of the Fair Value Quality Initiative (FVQI) to develop a framework to advance the quality of financial reporting valuations for SEC-registered U.S. public companies. FVQI Key Elements 1 VPOs vetted AICPA, ASA and RICS (Royal Institution of Chartered Surveyors) 2 A single set of qualifications with respect to education level and work experience 3 A continuing education curriculum 4 Standards of practice and ethics 5 A code of conduct 6 An inspection program and disciplinary mechanism 2

3 CEIV Timeline Key Dates in the Creation of the CEIV Credential December 2011: SEC comments on the valuation profession, including reference to qualifications. April 2012: Round Table hosted by The Appraisal Foundation (TAF) For years, regulators, auditors, standard-setters and valuation practitioners have expressed a need for greater commonality among financial reporting valuation standards, practices, education, qualifications and oversight. The Appraisal Foundation hosted a round table that addressed these topics directly. December 2013: Professional bodies and global accountancy firms convene in New York to discuss the issues raised by the SEC and to consider measures for developing a unified professional credential. December 2013: Additional SEC comments issued on the valuation profession indicating progress but stressing further work to be done. May 2014: Valuation Professional Organizations (VPOs), AICPA, ASA and RICS launch a collaborative effort to develop the joint CEIV Credential; agree approach to issues including governance, performance framework and quality control. October 2014: VPOs issues a whitepaper setting out the vision, solution, problem and process of the project. March 2015: VPOs, along with The Appraisal Foundation (TAF) and global valuation leaders from several large accounting firms, hold positive talks with key market stakeholders. Together, they discussed how these organizations are addressing concerns regarding professionalism in valuation. They also presented plans related to governance, education, performance guidelines and quality control for the new professional credential. October 2015: VPOs present update on CEIV Credential initiative at the International Valuation Standards Council (IVSC) Annual General Meeting in Paris. October 2015: ASA presents update on CEIV Credential initiative at the 2015 ASA Advanced Business Valuation Conference in Las Vegas, NV. October 2015: Fair Value Quality Initiative primary topic of discussion at the Appraisal Foundation s third Business Valuation Roundtable in Washington, DC. November 2015: AICPA presents update on CEIV Credential initiative at the annual AICPA Forensic and Valuation Services Conference. April 2016: RICS Summit of the Americas in Washington, DC includes a session with Paul Beswick, former US SEC Chief Accountant to promote the initiative. May 2016: VPOs publish a Mandatory Performance Framework (MPF), setting out the proposed details of the credential, including eligibility and assessment criteria, for 90 day public consultation. June 2016: ASA presents update on CEIV Credential initiative at the ASA/USC 11 th Annual Fair Value Conference San Francisco in San Francisco, CA. June/July 2016: VPOs request comments from the key market stakeholders on the Mandatory Performance Framework. September 2016: ASA presents update on CEIV Credential initiative at the 2016 ASA Advanced Business Valuation Conference in Boca Raton, FL. 3

4 New Credential CEIV and the MPF As part of the framework, the VPOs formed a joint task force to address many of the systemic concerns with the valuation profession. The task force included work-streams related to establishing performance framework, qualification for a certification and related educational requirements, and an inspection, quality, and disciplinary mechanism. Collectively, the work-streams address the improvements called for by the SEC staff. Emerging from the FVQI, a credential, Certified in Entity and Intangible Valuations (CEIV) was initiated along with the Mandatory Performance Framework (MPF) CEIV Available only to individuals that are members of qualified VPOs (alternate pathways available) Intended for professionals who perform fair value measurements for public company financial statement reporting purposes Included mandatory performance requirements CEIVs will be required to meet rigorous qualifications (education and experience) and ongoing education and credential maintenance requirements Mandatory Performance Framework Collaborated by the AICPA, ASA and RICS and issued in January 2017 Applicable to estimating the fair value of a business, business interest, intangible asset, certain liabilities or inventory 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) 4

5 CEIV Key Considerations Intended for professionals who perform fair value measurements for public company financial statement reporting purposes Intended for the valuation of non-financial instruments - businesses - business interests for goodwill impairment testing and stock compensation purposes - intangible assets for purchase price allocation and impairment testing purposes Professional qualifications - Minimum 3,000 hours of fair value measurements in the five years preceding application Accreditation and reaccreditation - Undertake education offered by the VPOs on fair value body of knowledge Accounting standards and regulatory environment Fair value technical guidance Auditing requirements MPF requirements Performance requirements - Compliance with MPF - CPE requirements - Continuing experience (1,500 hours of fair value measurement over a rolling three year period) Quality review and discipline - Complaints protocol pertaining to CEIV credential holders Ethics and Enforcement - Review of fair value for financial reporting work performed 5

6 MPF Key Considerations Creates a framework for valuing non-financial instruments The framework establishes a minimum level of diligence, rigor and documentation for valuation professionals. It focuses on how much to do rather than technical guidance on what to do Promotes quality, consistency and auditability The valuation professional must support the conclusion of value with sufficient detail to provide a clear and well organized link from the data and information gathered to the final conclusion of value presented in the final valuation report. An experienced professional (for example, audit professional, client, and valuation professional) reviewing the final valuation report who has no involvement with the engagement must be able to: Understand the nature, extent and results of the procedures performed Understand the approaches and methods used in the valuation analysis, and if applicable, understand why commonly used approaches and methods were not used Understand the inputs, judgments and assumptions made and the rationale for their use Determine who performed the work and their qualifications Identify parties, such as management, who reviewed the valuation documentation 6

7 CEIV Implication and Current Status CEIV Adoption It is expected that all valuation professionals providing fair value measurements for financial reporting purposes for SEC-registered U.S. public companies will be required to be CEIV credentialed - At a minimum, adherence to the MPF will be expected regardless of individual practitioner This includes third party appraisers such as Lincoln as well as internal valuation specialists at funds (i.e. the valuation personnel at SEC registered firms) While new, the CEIV and MPF still have issues to be resolved: - Uncertainty regarding the interpretation of the MPF differences exist between the ASA and AICPA - Practice divergence Big 4 and other appraisal firms have not universally agreed on how to review and implement the MPF - CEIV test has errors and is expected to be revised Implications Currently there is divergence in practice regarding the adoption of CEIV - Some firms are requiring everyone to have the designation by year end - Some firms are requiring only officers to obtain the designation - Some firms are still taking a wait and see approach - Current ASA, AICPA and CFA members are encouraged to obtain the credential Proposed CVFI Designation CEIV covers primarily business valuations and intangible assets Proposed on June 27, 2017, the AICPA issued an Exposure Draft regarding a Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments ( CVFI ) Credential - Financial instruments - Share-based compensation - Portfolio investments The approach will parallel the CEIV process, but the exposure draft was just released. There are as many questions as there are answers regarding this credential - May only apply to CPAs/ABVs 7

8 Regulatory Developments PCAOB PCAOB inspections staff continue to observe deficiencies related to auditors' use of specialists' work, such as failures to evaluate the assumptions used in fair value measurements or failures to consider contradictory evidence. In June 2017 the PCAOB issued a draft of new standards regarding auditing fair value assets. The PCAOB proposed replacing three auditing standards on accounting estimates and fair value measurements with a single standard that focus the auditor s attention on addressing potential management bias in fair value estimates, reinforce the need for professional skepticism and clarify the requirements for auditing fair value estimates. PCAOB realized that there is substantial diversity in practice regarding the use of the work of specialists, such as the procedures auditors perform to evaluate the work of companies specialists. - Therefore, the new standards expand the requirements for auditing accounting estimates, including fair value measurements, and the requirements for using the work of a specialist in an audit - The proposal on using the work of specialists would expand the requirements for evaluating the work of a company s specialist and apply a risk-based approach to supervising and evaluating the work of specialists employed or engaged by the auditor The proposed standards will increase the amount of scrutiny auditors will be required to comply with regarding auditing fair value assertions and require greater skepticism to be employed regarding the use of prospective financial information. - It includes commentary to guide auditors in determining whether pricing information provides sufficient appropriate audit evidence. Specifically, auditors will be required to: - Obtain an understanding of the work and reports of the company's specialist. - Perform procedures to assess the work of a company's specialist, including: 1. testing and evaluating the data used by the specialist and evaluating whether the data was appropriately used by the specialist; 2. evaluating the methods and significant assumptions used by the specialist; and, 3. evaluating the relevance and reliability of the specialist s work and its relationship to the relevant fair value assertion Comments on the proposal are due August 30,