Preferred Return || Valuation reports for 409A ASC718 || fairness opinions

IRC 409A - Fair Value of Deferred Compensation

A tax standard maintained by the IRS, IRC Section 409A regulates nonqualified deferred compensation. Introduced in the wake of the Enron and option backdating scandals, these exhaustive requirements are meant to ensure that private companies issue stock options at or above the fair market value of the underlying common stock at the time issued. Although stock options are the most common form of nonqualified deferred compensation, 409A also regulates similar equity incentives. In order to allocate the value of the equity among different classes of shareholders, a 409A valuation incorporates the financial features of your company's capital structure.

Penalties for non-compliance with IRC 409A are extremely severe, including acceleration of taxable income (tax on the entire difference between the original grant price and the ultimate sale price), increased withholding, and a 20% additional income tax, in some cases at both the state and federal levels, but Preferred Return works from the standpoint that a 409A valuation is not just an opportunity for regulatory compliance -- it is a chance to take a closer look at your company's capital structure, equity incentives, and historical performance. An independent appraisal establishes fair market value and provides your company with a valuation safe harbor. In addition to our legal and financial expertise, Preferred Return is one of the most tech-savvy valuation firms on the market. Our proprietary software builds a dynamic waterfall model and aids in the calculation of Total Enterprise Value, resulting in a fair and accurate valuation that isn't blind to your company's capitalization.

For companies preparing audited financials and seeking to comply with ASC 718 (formerly SFAS 123R) and ASC 820 (formerly SFAS 157) in addition to IRC 409A, we offer a popular package deal in which all three topics are satisfied in one report, for the same low price.

IRC Section 409A was first introduced in 2005 and compliance has been mandatory since January 1, 2009 for any private company issuing stock options or similar equity incentives. For an independent IRC 409A valuation to be presumed reasonable by the IRS, the valuation date must be no more than 12 months before the date of the option grant. The IRS defines nonqualified deferred compensation as compensation that workers earn in one year, but that is paid in a future year. Note that such an arrangement differs from elective deferrals to qualified plans, often referred to as "retirement plans" (such as a 401(k) plan), or to a 403(b) or 457(b) plan. Note also that IRC 409A has no effect on FICA (Social Security and Medicare) tax.

ASC 820 - Fair Value

ASC Topic 820 (also referred to as ASC820, formerly FAS 157), published by the Financial Accounting Standards Board (FASB), is a GAAP standard that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Coming in the wake of the recent financial crisis, the statement is generally a move toward a market-based (rather than entity-specific) determination of the fair value of a company's assets and liabilities.

ASC 820's re-definition of fair value focuses on the exit price (the price that would be received to sell the asset or paid to transfer the liability) rather than the entry price (the price that would be paid to acquire the asset or received to assume the liability). The statement establishes a fair-value hierarchy, beginning with quoted prices in active markets for identical assets and liabilities; followed by inputs other than quoted market prices that are directly or indirectly observable for the asset or liability; and ending, broadly, with unobservable inputs reflecting the company’s assumptions about the inputs that a market participant would use to price the asset or liability.

This redefinition is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The fair value of your company's assets and liabilities will not necessarily change in an up-to-date ASC 820 valuation. Yet the move toward market-based determination of fair value, where the measurement is based on the assumptions that market participants would use in pricing the asset or liability, can be dramatic in certain cases. A rigorous ASC 820 valuation is not just good accounting before the prospect of an audit, it is also essential to profitability. Preferred Return's proprietary software and legal and financial expertise streamline ASC 820 compliance and provide audit-ready results so that you can get back to running your company.

We encourage companies seeking to satisfy ASC 820, ASC 718, and IRC 409A to consider our popular package deal in which all three topics are satisfied in one report, for the same low price.

ASC 718 - Stock Based Compensation

ASC Topic 718 (also referred to as ASC718, formerly FAS 123R), published by the Financial Accounting Standards Board (FASB), is a GAAP standard that requires correct expensing of employee stock options. ASC 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.

ASC 718 establishes fair-value methodologies that can be used to account for transactions in which an entity exchanges its equity instruments for goods or services. For most companies, especially pre-IPO start-ups, this exchange takes place through an arrangement of stock options. ASC 718 is concerned that fair value methodologies be used in every stage of a valuation, from the evaluation of your company's equity structure and a review of all classes of equity, to the determination of your company's enterprise value, to the allocation of this value among equity classes. Preferred Return's expert knowledge of the financial and legal terms that govern different classes of stock is invaluable in determining and meeting ASC 718 and related standards. Following a sophisticated, defensible calculation of your company's Total Enterprise Value, we build complex waterfall models that calculate the payouts to every class of stock at a continuum of exit events.

Preferred Return specializes in helping private companies meet accounting standards. We are concerned primarily with rigorously meeting guidelines set by regulatory bodies and professional associations like the AICPA. If your company is considering hiring Preferred Return for an ASC 718, IRC 409A, or ASC 820 valuation, we encourage you to consider our popular package deal in which all three topics are satisfied in one report, for the same low price. ASC 718 and IRC 409A both describe methods and regulations relating to the establishment of "fair value" of deferred compensation (mostly in the form of stocks). ASC 820 re-defines "fair value." Sometimes confused with one another, ASC 718 is concerned with the calculation and presentation of financials for an audit or report, while IRC Section 409A is a tax regulation that regulates deferred compensation. Note that in the case of publicly traded companies, ASC 718 is overseen by the SEC.

ASC 815 - Hedging and Embedded Derivatives

ASC Topic 815 (also referred to as ASC815, formerly SFAS 133 and 155) is an accounting standard published by the Financial Accounting Standards Board (FASB) concerning the fair value accounting for derivative and hedging instruments. Seeking transparency in the quantity, variety and fair value of derivatives, ASC 18 requires that all derivatives, including embedded derivatives, be accounted for as liabilities or assets; they must be accounted for, and marked to market.

Preferred Return will work with your financial professionals to determine the fair value of embedded derivatives in your capital structure. Many contemporary business arrangements and recapitalizations involve complex securities and derivatives, and we understand that every situation is unique and worth close analysis. Our proprietary software, dynamic models and expert valuation experience bring clarity to what might otherwise be a mystifying process. Preferred Return's fair value opinions are prepared under the highest financial reporting standards and using only AICPA-approved valuation methods. We share your goal not just to satisfy rigorous audits, but to grow your company smartly and sustainably through defensible compensation. Let us show you the true value in mark-to-market accounting methodologies.

ASC 805 - Purchase Price Allocation

ASC Topic 805 (also referred to as ASC805; the successor to FAS 141R), published by the Financial Accounting Standards Board (FASB), is the newest, most up-to-date accounting and reporting requirement for business acquisitions.

In what some consider a radical redefinition of accounting for business combinations, ASC 805 marks a switch from a cost allocation method to a purchase method, attempting to ensure that certain assets and liabilities are not overlooked, do not go unrecognized, and when they are recognized are measured at fair value as of the acquisition date. This includes assets acquired and liabilities assumed that arise from contractual contingencies as of the acquisition date.

Like many financial statements and regulations issued and established in the wake of the "Enron scandal," ASC 805, issued in late 2007, focuses on fair-value accounting and increased transparency. This change is perhaps clearest in ASC 805's redefinition of the accounting for bargain purchases (ie. instances of "negative goodwill," where, at the date of acquisition, the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree). Under previous requirements (FAS 141) this “negative goodwill” amount was allocated as a pro-rata reduction, a reduction of amounts which otherwise would have been assigned to particular assets acquired, while under ASC 805 the acquirer must recognize the total excess in earnings as a gain; this excessive "extraordinary gain" (non-recurring, non-operating profit in a particular fiscal year) is well worth considering in any current or potential business combination as it can obviously lead to dramatically higher current period earnings, as well as lower future period earnings.

Preferred Return is intimately familiar with fair value accounting, including ASC 805, the fair value methodologies established by ASC 718, and related standards. Like your new business combination, our dynamic, responsive models have an eye on the future. We can also set up valuation models for items that require periodic updates. In regards to purchase price allocation, Preferred Return provides clarity in the consideration of contingencies, and value where it's needed the most.

ASC 350/360 - Impairment Testing

ASC Topic 350 and ASC Topic 360 (also referred to as ASC350 and ASC360, formerly SFAS 142 and 144, respectively), published by the Financial Accounting Standards Board (FASB), are accounting standards that require two-step tests for the calculation and evaluation of value impairment. ASC 350 concerns goodwill and (indefinite-lived) intangible assets. ASC 360 concerns long-lived (but finite-lived) intangibles. ASC 350 and ASC 360, which are usually satisfied in tandem, both require a test for impairment and then, if impairment is found, a measurement of the amount of impairment.

Under ASC 805, which pertains to business combinations, goodwill is measured on a residual basis as the excess of the consideration paid over the fair values of the identifiable net assets acquired. Although goodwill is still recognized as an asset, amortization of goodwill is no longer permitted under ASC 350. Instead, goodwill and other particular intangibles are subject to an annual value-impairment test. If the carrying value is greater than the fair value, there is an indication that an impairment may exist and the second step is required. In addition to this annual test, an impairment test is necessary whenever an event occurs whereby it is reasonable to assume that the fair value of a reporting unit is reduced below its carrying value.

How does ASC 360 determine a likely case of impairment? One way is that ASC 360 analyzes undiscounted cash flows associated with long-lived, finite-lived assets in order to determine whether there is an impairment loss. To determine impairment, the test compares the carrying value of the long-lived asset (asset group) to the sum of its future cash flows. There is impairment if the carrying value is not recoverable from the future cash flow. An asset group can contain multiple intangible assets, and part of the valuation process rests in the accounting for such arrangements. Intangible assets are subject to a range of requirements and definitions dramatically different from those in play five years ago.