Guest Author - Consuelo Herrera, CAMS, CFE
Many forensic accountants are contacted to help business owners determine the true value on an enterprise. The ultimate goal of financial reporting is to aid stakeholders such as investors, creditors, unions, employees, and others in making sound economic decisions.
The detailed valuation information that corporations need to make decisions on business acquisition and disposal, whether to support a transaction with debt funding, on cross border transfers, accounting compliance and tax management is part of consulting services that specialized accounting firms deliver to large clients as banks and manufacturing companies. When dealing with legal proceedings it is key to determine the true worth of assets and liabilities. Assets such as machinery and equipment should be substantiated by a certified appraisal that withstands scrutiny.
To give an accurate answer properly valuating assets, liabilities, and owners’ equity is key.
Methods for valuating assets are: Historical cost, market value, replacement cost, price-level adjusted and discounted cash flows.
The Historical cost reflects the acquisition cost less de4preciation or amortization to date. Critics of this method argue that it often fails to reflect either the current value of the asset or changes due to the purchasing power of the dollar.
The hypothetical selling price that could be obtained in an arm’s length transaction if the objective of the market value, which has yielded to large discussions where pros and cons are being analyzed.
The current replacement cost if the price of a new similar asset after allowance for use and depreciation. This method is used on in certain cases, especially where the utility of inventory has diminished.
Liabilities are valued at their current debt equivalent, however for long-term liabilities discounting to present value the future sums required to satisfy a liability is the proper way to go. Short-term liabilities are stated at the face amount.
Owners’ equity valuation depends on the amounts presented for assets and liabilities.
A major component of a valuation is valuation of intangible assets. The valuation for Intangible Assets, Goodwill, and Impairment, which must be valued pursuant to the Financial Accounting Standards Board Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations and (SFAS) No. 142 Goodwill and Other Intangible Assets.
Some of the valuation services offered by forensic accounting firms are:
O Cost Segregation Studies
O Machinery & Equipment Appraisals
O Business and Stock Valuations
O Intangible Asset and Intellectual Property Valuations
O Fairness Opinions and Solvency Opinions
O Valuations for Litigation Support
O 409A Stock Option Valuations
O Real Estate Market Studies
O Real Estate Appraisals.
When valuating a business the following components are taken into consideration: The income statement, the balance sheet through which the net worth is determined, the discounted cash flow valuation, the Weighted Average Cost of Capital or WACC, and a ratio analysis the portrays the well being of an organization. Net worth is the result of subtracting the total liabilities from the total assets.
A simple approach for forensic accountants is using the business valuation methods suggested by the Small Business Administration, SBA, which includes:
1. Adjusted Book Value
2. Capitalized Adjusted Earnings
3. Discounted Future Earnings
4. Cash Flow Method
5. Gross Revenue Multiplier
When applying these methods, all valuations must be based on historical data as per the SBA request.
Forensic accountants need also consider non-quantitative factors such as a justification for the sale of the business, the length of time the company has been in business, the industry or market in which the organization operates, a projection of growth based of historical figures, and specific situations in other countries such as protectionism tariffs, and other entry barriers that prevent a business for successfully reaching its goals in foreign markets.