Finding the Value in Fair Value

By Gretchen G. Naso, CVA

Over the past 15 years, fair value accounting has evolved to become a part of many private companies’ financial statements. This evolution has not come without controversy. Due to its heavy reliance on assumptions and professional judgment, fair value reporting is dismissed by critics as an art, not a science, and is often considered unreliable.

In response to these and other concerns, three valuation professional organizations – the AICPA, the American Society of Appraisers (ASA), and the Royal Institution of Chartered Surveyors (RICS) – formed the Fair Value Quality Initiative. In January 2017 it issued the Mandatory Performance Framework1 (MPF). The MPF provides guidance on the supporting documentation that should be prepared when conducting valuations for financial reporting purposes. A companion document, Application of the Mandatory Performance Framework, provides guidance on the application of the MPF to specific subject interests. The group also developed a new professional designation, certified in entity and intangible valuation (CEIV). The goal of these initiatives is to provide valuation professionals with the tools to provide higher quality and better documented fair value valuation engagements.

This is all good news for companies who rely on fair value measurements in financial reporting and for management decision-making. Adherence to the MPF will be considered a best practice, and fair value measurements will become more transparent and reliable. A related and more subtle benefit is the wealth of company-specific and industry information considered in a fair value measurement. This data is often the key to understanding exactly what drives company value.

In a typical fair value assignment performed for the purpose of allocating purchase price in a business combination under ASC 805, Business Combinations, a valuation professional will gather the following data, as appropriate given the facts and circumstances.

Customer-related intangible assets – The company’s historical customer attrition rates, industry information on competitors’ attrition rates, historical and projected costs of retaining existing customers and attracting new customers, and the economic life of existing customer relationships are all important components of a fair-value measurement of customer-related intangible assets, such as customer relationships.

Value: Understanding the details inherent in a fair-value measurement of existing customer relationships enables management to leverage that information into sales and marketing strategies to drive repeat business and future revenue. Investment in customer retention can reduce operating costs, increase long-term profitability, and boost company value.

Marketing-related intangible assets
– Observed royalty rates and terms in arms-length, negotiated transactions and associated maintenance expenses are both primary assumptions in the measurement of the fair value of trademarks, trade names, brands, and company logos.

Value: As a company’s brand reputation strengthens, so does the value of the trademarks that protect its design and text elements. Trademarked brands can influence buying decisions and increase customer loyalty. Respected and easily identifiable trademarks can help companies expand more easily into new products or services, and enhance marketability in the event of a sale of the business.

Assembled workforce – A fair-value measurement of an assembled workforce requires data on costs of recruiting, hiring, and training employees based on their functional classification within a company.

Value: A well-trained, highly skilled workforce can be a significant value driver because it relieves potential buyers from the considerable expense of recruiting, hiring, and training an entirely new team. This perspective can inform decisions and policies related to workforce development, training, recruitment and talent retention, employee engagement, and even compensation. With technology shaking up the modern workplace and the wave of baby boomer retirements draining decades of experience from the workforce, it will become imperative for companies to focus their approach to attracting, developing, and retaining talented employees. Fairly assessing their value is an important first step in this effort.

The goals of the MPF include greater consistency, reliability, and transparency in fair-value measurements. Its rigorous documentation requirements are a win-win for management. Aside from the above benefits, future fair-value measurements will provide information that can be deployed strategically by decision-makers to support growth, expansion, and competitiveness in the marketplace.


Gretchen G. Naso, CVA, is a principal in the business consulting services group of RKL LLP in Wyomissing, PA. She can be reached at Reprinted with permission of the Pennsylvania Institute of Certified Public Accountants.