Compliance with financial reporting standards often requires obtaining independent appraisals. Mercovus authors independent valuation reports for purchase price allocations, goodwill impairment, embedded derivatives, and portfolio valuations, among other use cases. Auditors refer to us because our work consistently withstands their rigorous scrutiny.
Warrants may need to be valued separately from the financial instruments to which they were attached in accordance with ASC 815 and ASC 820. Despite well-documented issues of volatility skews (sneers and smiles), Black-Scholes is widely considered to provide reasonable valuations of simple derivatives. But what about complex securities? What if a warrant is exercisable into either common stock, or a future round of preferred stock (if one occurs)? What if the exercise price is adjustable based on certain milestones? These complicating factors “break” Black-Scholes and require the use of customized modeling.
Contingent liabilities are intricately linked to uncertain future events, and their valuation can be challenging due to their complexity. Valuing these complex securities typically involves the use of probabilistic models that make assumptions about the complete range of potential outcomes, rather than just the expected scenario. This is a significant distinction between valuing a business and valuing a contingent consideration.
Whether you need a valuation for warrants, contingent liabilities, or other complex securities, rest assured that the appraisers at Mercovus enjoy modeling the impact of the underlying security’s complex terms using statistical software and Monte Carlo simulations. They are equally skilled in taking off their “mathematician hat” and explaining modeling and valuation assumptions to clients and third-party reviewers in lay terms.
Purchase Price Allocations (PPAs)
Accounting rules can be counterintuitive. Self-developed intangible assets typically aren’t on the balance sheet but acquired intangible assets are. But how much of the purchase consideration is attributable to the patent portfolio? The customer relationships? And if the acquiror paid in shares of its own stock and a cash earnout, what exactly is the value of “the purchase consideration” in the first place? These are not easy questions for management teams to answer: Fortunately, Mercovus has the expertise to help.
Under GAAP, ASC 805, and International Financial Reporting Standards (IFRS) 3, the acquiring company must allocate the purchase consideration to the assets and liabilities acquired, according to their “fair value”, and then periodically review those fair values for impairment.
Mercovus authors valuation reports that meet these financial reporting requirements. Throughout our engagement, we identify the intangibles that require an appraisal, select the most suitable valuation methodologies, estimate the intangible values, and reconcile them to the transaction or enterprise value. Our clients receive comprehensive reports that support our calculations and analysis.
Asset and Goodwill Impairment
Once a company has intangible assets or goodwill on its balance sheet, it must annually review the value of those assets to determine whether they are “impaired” and, if so, determine the amount by which the value should be reduced.
According to ASC 350 and ASC 360, a goodwill impairment test is required at least once a year, and more frequently in the event of adverse regulatory activity or a decline in economic conditions, as the case may be. Goodwill impairment occurs when the carrying amount of a goodwill asset is greater than its “fair value”. Similarly for asset impairments and disposals of long-lived assets, a company recognizes an impairment loss only if the carrying amount is not recoverable from its undiscounted cash flows.
Mercovus has developed an in-depth understanding of the valuation requirements under ASC 350 and ASC 360, as well as the key areas of concern to auditors and regulators. Our experts can assist management in identifying areas of impairment risk, while easily navigating complex corporate structures.
If you want to know the market value of public company stock, you can “google it”. For privately held companies, there is no publicly traded stock from which to obtain a value: So what should someone do when they want to grant stock-based compensation to employees? Then it is time to go obtain a professional opinion of value. Mercovus can help.
Granting stock-based compensation has implications for financial reporting under the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 and ASC 505-50, as well as tax compliance under Internal Revenue Code Section 409A (IRC 409A). According to ASC 718, equity awards need to be accounted for at “fair value” – a very technical term with strict requirements. The US Securities and Exchange Commission (SEC) typically scrutinizes the valuation methodology employed in connection with a company’s equity award process over 12 to 18 months prior to a contemplated IPO date.
Navigating these complexities can be daunting, but Mercovus has authored valuation reports for the purpose of granting stock-based compensation that meet these stringent tax and financial reporting requirements. Our valuations have been reviewed by the SEC, all of the Big Four and other major accounting firms, and passed Statement on Auditing Standards (SAS) 73 review. We can help determine the value of your company’s common stock on a yearly basis or more frequently if a material event occurs, such as a financing.
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For assistance with quality valuations to meet stringent financial reporting requirements, contact Mercovus at firstname.lastname@example.org.
 See, for example Sundheim, Eric. "Implied Volatility and Volatility Smiles in Option-Pricing-Based Security and Business Valuations," Business Valuation Review: Spring 2015, Vol. 34, No. 1, pp. 31-38.