Need For Valuation Specialists Grows as FASB Moves Toward Convergence
The number of global deals has grown exponentially, increasing the need for thorough due diligence. Through mid-December, global announced M&A activity shattered all previous records to reach $4.35 trillion, a 20% increase over last year’s record, according to Thomson Financial. But new M&A accounting rules recently issued by the Financial Accounting Standards Board (FASB) could demand even more valuation work and bring unwanted volatility to earnings, according to a report in Financial Week. As a result, corporate accountants will be forced to shoulder the responsibility.
Executive search firm, A.E. Feldman, says the ability to understand a company’s fundamentals and transaction risk and arrive at an appropriate valuation is critical. The firm reports that the number of accounting jobs for valuation specialists and IFRS-trained professionals is increasing.
The FASB issued a revision to its rule on business combinations and a new rule on how to account for minority interests - a significant move towards convergence. Financial accounting standards FAS 141(R) accounting for business combinations and FAS 160 covering and the consolidation of subsidiaries will become effective for U.S.-listed companies after December 15, 2008.
According to CFO.com, the new rules represent a major departure from the historical cost accounting that many companies use now. Financial Week quotes former FASB Chairman, Dennis Beresford, as saying, “The rules will be difficult to apply and will require companies and analysts to relearn a lot of things.”
FAS 141 requires all business combinations to be accounted for using the purchase method or the purchase of one company by another. Companies are also required to identify and value intangible assets related to business acquisitions, such as customer lists, supplier relationships, contractual rights, trademarks, brand names, trade secrets, and patents. Moreover, FAS 160 requires that companies report minority investments in subsidiaries in the same way - as equity rather than minority interests between liabilities and equity.
Compliance with the revisions will place added pressure on valuation specialists, increase the workload of corporate finance departments, and inject a degree of volatility into earnings reporting as assets and liabilities are marked to market, according to Financial Week.
