AICPA standards and premises of value Flashcards
In business valuation, what are the two main premises of value
1) going concern value
2) liquidation value
in business valuation, what is the going concern value?
the value of a business enterprise that is expected to continue to operate into the future. this concept assumes that a business enterprise is expected to continue operations into perpetuity
in business valuation, what is the liquidation value?
the net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced”, at which the assets are sold over a reasonable time to maximize pro or liquidation value.
what is a privately issued security?
the fair value of individual common shares or other equity securities that constitute a minority of the outstanding securities.
what does a “top-down” method refer to? (what steps does it involve)
a top down involves first valuing the enterprise value, subtracting the fv of debt to fb of equity (if needed), and then using that equity valuation as a basis for allocating the equity value among the enterprise’s privately issued securities (common/other equity).
what is the difference btween FASB ASC 718 and FASB ASC 505-50
FASB ASC 718 addresses share-based payments to employees, FASB ASC 505-50 pertains to share-based payments to nonemployees
which set of accounting principles is fair value based on?
fair value is based on generally accepted accounting principles (GAAP) if it’s a US company, which bases it on FASB ASC 718 and FASB 505-50
What is the fair value definition under ASC 820
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.
what is the fair value definition under FASB ASC 718/505-50
The amount at which an asset (or liability) could be brought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale
what small difference is there between ASC 718 and 820
ASC Does not apply to accounting principles that address share-based payment transactions.
what is the Fair Market Value definition under IRS Revenue Ruling 59-60
The FMV is the price at which property would change hands between a willing buyer and a willing seller when the former is not under and compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
What is the Fair market value as defined by the international glossary of business valuation terms? (hint: not that different from irs ruling 59-60)
the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
FASB ASC 820 establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value. what are the three levels?
Level 1 asset: Most liquid (quoted market prices in active markets)
Level 2 asset: quoted prices of similar active/inactive markets (gpc/gtc, etc)
Level 3 asset: Unobservable. Complex products (ex - preferred stock). (Information not publicly available) (where valuators come into play - consultants)
what are the 6 stages, and what is the usual type of financing per each?
stage 1: seed capital or first round financing (by friends, family, angels, VC firms)
stage 2: second or third round of financing occurs during this stage. (VC usually)
stage 3: later rounds of financing from vc or strategic business partners (securities issued to investors in the form of pref stock)
stage 4: mezzanine rounds of financing occur. (this is where we would begin to also see talks of IPO’s with IB)
Stage 5: Liquidity event /IPO discussions. Securities form (common/pref)
stage 6: either remains private or goes IPO
what are the 6 stages, and the operation position in each
stage 1: enterprise has no product revenue, incomplete management, initial product development
stage 2: enterprise has no product revenue, substantive expense history, product development on the way
stage 3: enterprise has made significant progress in product development. key milestones met, development near completion. no revenue
stage 4: additional key developments met, some form of revenue, still operating at loss.
stage 5: enterprise has product revenue, achieved breakthrough of financial success (achieved op profitability/positive CF B.E.)
stage 6: has good financial history, profitable operations, good CF.
