BUSI 534 – DB1 6/3/18
Discussion Board Instructions
There will be four (4) Discussion Board Forums throughout the course. The purpose of
Discussion Board Forums is to generate interaction among students in regard to relevant course
topics.
You are required to submit a thread of at least 500 words in response to the provided prompt for
each forum. In addition to the thread, you must reply to at least 2 classmates’ threads. Each reply
must be at least 450 words.
For each thread, you must support your assertions with at least 2 scholarly/professional sources
and one biblical integration, in current APA format. Each reply must cite at least 2
scholarly/professional sources and also include biblical integration.
Acceptable scholarly/professional sources include the textbook, and scholarly/peer-reviewed
journal articles, and professional valuation websites.
BUSI 534 – DB1 6/3/18
BUSI 534 -B01 Discussion Boards 1-4 and Replies
Julie Mather
Liberty University Online
BUSI 534 – DB1 6/3/18
Discussion Board 1:
According to the text, “Every business enterprise will have its own unique attributes and risks,
which can be incorporated into the rate of return.” Choose an existing company and discuss the
unique attributes and risks specific to that company, expounding upon how those factors impact
its rate of return.
With the rise of modern automation technology comes the need for robotic integration
and fewer human hands in assembly lines. Companies are turning to custom automation
manufacturing companies with the need for challenging and precise automation technology for
processing their products. FANUC America Corporation is one of the world’s leading producers
of robotics, CNC systems and factory automation and serves its customers with training
opportunities and product simulations. Along with their unique perspective in automation robotic
integration in the modern machining packaging industry comes the responsibility to their
customers to constantly be improving their product lines, service, and training opportunities
factor that drew those customers in the first place.
Several factors that make Fanuc unique comparatively to its competitors include: on site
trainings for current customers, broad spectrum of products compatible with multiple industry
applications, and a committed customer service team. The on-site trainings and representative
conferences are offered at the clients need. Fanuc has intentionally made their business customer
driven and focused heavily on investing in their education of the products offered by Fanuc. By
training their customers to be fluent in Fanuc robotics and software ensures that their product
will be utilized in future project because they are familiar to the company.
“Creating goodwill with customers doesn't cost a lot of money (Douglass, 2015).” The intentions
of the giver (the server) affect the value of the gift (the service).Fanuc is widely known for their
robotic processes and recently have added an eight jointed robot that can more effectively
operate in a small cell within an assembly line or process. Additionally, they have remained
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dedicated to their customer service team by presenting in depth manuals for products and
assistance in the field if a customer required troubleshooting on a robot. Fanuc has primarily set
itself apart from other robotic producers like Kuka or Universal by fully committing to products
that drive their business and hold their value over time in addition to being available for any
problems that may arise during a project.
As mentioned above there are several competing robotic companies who produce related
products as Fanuc; however, they compete with each other more than with Fanuc primarily
because Fanuc is such a large company. An area that may be a challenge for Fanuc robotics
comes in the form of custom automation projects. Various trends, such as increasing outsourcing
activities, global competition, increased demand for on-time delivery, rapid technological
change, and short product life-cycles, indicate the importance of supply chain risk management
(Zhao et. al, 2013). While their larger robots are the muscle in the packaging industry, smaller
robots capable of precise pick and placement actions or heat sealing electronic components have
yet to be popular choice for customers. Perhaps it is their more global presence and strength in
larger projects that make their smaller robotic products overlooked.
The rates of return on their larger robot cells is evident as it is their primary product line,
but it could be said that their efforts to increase customer education, training, troubleshooting
have influenced the revenues earned. Scripture teaches business owners to consider their services
and to consider that their reputation is the reputation of Christ. “Whatever you do, work at it with
all your heart, as working for the Lord, not for human masters (Colossians 3:23).” The Lord is
the one who is to judge and we are called to show love to others regardless of their responses to
us. Businesses like Fanuc, while perhaps not operated under Christian management still seek to
serve their customers with willingness and courtesy.
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References
Douglass, C. (2015, October 5). The language of customer service. Arkansas Business, 32(40),
35. Retrieved from
http://link.galegroup.com.ezproxy.liberty.edu/apps/doc/A433436423/GRGM?
u=vic_liberty&sid=GRGM&xid=8470210a
Zhao, L., Huo, B., Sun, L., & Zhao, X. (2013). The impact of supply chain risk on supply chain
integration and company performance: A global investigation.Supply Chain
Management, 18(2), 115-131.
doi:http://dx.doi.org.ezproxy.liberty.edu/10.1108/135985413113187
BUSI 534 – DB1 6/3/18
Reply 1
Ken – great discussion on Tesla! Definitely a very up and coming company with a
headpiece like Elon Musk spearheading space and innovative solutions to electric vehicles. I
think he is of a similar mindset to Steve Jobs, the founder of Apple with his forward-thinking
frame of mind drawing from his wealth of knowledge to foresee what people want before they
even want it. Knowing that consumers have such an affinity for green energy and the social
responsibility we all have to this world, Tesla has hit the ground running with their electric cars.
As they become more widely available to consumers at a more affordable price I would assume
the popularity of the Tesla models will increase.
Like Steve Jobs, Elon Musk has integrated the most sophisticated technology into his
vehicles and draw the attention of many buyers from a technology standpoint. The automobile
industry is rather established, and Tesla has made itself a place in a very saturated market by
setting itself apart. “Despite the acclaim, Tesla faces enormous challenges in penetrating an
automotive market that has been dominated for a century by internal combustion engines. Not
only must it build cars that customers want to drive (and ultimately produce them cost-
effectively), but it must build the battery-swapping and charging infrastructure that makes
charging as easy and reliable as pumping gas (Crane, 2014).”
A similar challenge has been reducing the price of a Tesla to an amount the average
consumer can afford. The tax benefits you’ve discussed have largely been a contributing factor.
On the flip side, consumers who purchase an electric vehicle receive tax incentives in the United
States to offset their annual tax liability. This additional break has influenced may Americans to
“pull the plug” and choose Telsa as their next vehicle choice. “Fueled by the nation's automobile
dealers, many preexisting state dealer franchise regimes outlaw Tesla's sales model, and recent
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legislation in other states likewise aims to ban that practice (Stolze, 2015).” As some dealers are
struggling to put Teslas on their lot, dealerships have taken a different direction to sell Elon
Musk’s electric cars. Overcoming this setback, Telsa has focused on the direct sales method for
selling their cars and have seen increased success.
I think Elon Musk has found a niche market for his Telsas, but also provided a solution to
the overwhelming number of cars emitting gaseous fumes in big cities. Electric cars are only part
of the solution to be a more environmentally friendly planet, Mr. Musk is taking steps to make
that a reality. Even in the Bible it speaks of respect and care for the environment. Psalm 89.11
says, “The heavens are Yours, the earth also is Yours; The world and all it contains, You have
founded them.” We have received a charge from Scripture to be good stewards of our Earth and I
believe Elon Musk is doing his part by continuing to improve electric vehicles for consumers.
Crane, D. A. (2014). TESLA AND THE CAR DEALERS' LOBBY. Regulation, 37(2), 10-14.
Retrieved from http://ezproxy.liberty.edu/login?url=https://search-proquest-
com.ezproxy.liberty.edu/docview/1546004564?accountid=12085
Stolze, E. D. (2015, Winter). A billion dollar franchise fee? Tesla Motors' battle for direct sales:
state dealer franchise law and politics. Franchise Law Journal, 34(3), 293+. Retrieved
from http://link.galegroup.com.ezproxy.liberty.edu/apps/doc/A406163112/AONE?
u=vic_liberty&sid=AONE&xid=abb160d4
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Reply 2
Ian, thanks for your sharing your insight on Apple! As an Apple user, I have an
appreciation for their products and have personally chosen to use the iPhone and Macbook
products in the past few years. Apple has proven themselves to have a competitive advantage in
the cell phone market and recently have extended their product line to include the smart watch
they named Apple Watch. Their market dominance in the cell phone and personal computer
marketplace is largely to their commitment to innovation, product design and premium product
placement. Apple primarily relies on the consumer assumption that their products are premium in
the market space while their operating system is designed for a more creative user experience.
You mentioned the importance of the response from consumers in the market to Apple
products as an important factor to consider when determining the company’s future valuation.
Apple has a reputation for being incredibly secretive, with a whole industry set up through online
communities devoted to second-guessing and uncovering its next new product innovation
(Strategic Direction, 2011). Avid Apple followers spend lots of effort and time speculating what
the newest and greatest technological advancements will be presented at the annual unveiling of
Apple products and updates to their operating system during each keynote address. Steve Jobs,
the founder of Apple had a forward-thinking frame of mind and drawing from his wealth of
knowledge could foresee what people wanted before they even knew it. Knowing that consumers
have such an affinity for a great user experience and premium products Apple continues to
produce innovation that excites and generates creativity among consumers.
While Apple is a multi-billion-dollar company, there is a continual push to make their
margins and revenue sources more diverse whether that’s through new product development,
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innovative operating systems, or a more connected interface among the Apple product lineup.
Getting to market on time and at the right price is vital for Apple like many other technology
companies (Research Technology Management, 2004). Being the first to create a new concept
may provide the stepping stone for other companies to improve upon your idea and bring it to
market more quickly. For example, Amazon’s Alexa was brought on nearly two years before
Apple released it’s Apple Home entertainment and music player. It is my expectation that the
Apple Home will be competitive with Amazon’s Alexa and more popular amount current Apple
product users. Establishing their place in the market for smart speakers by introducing an Apple
product to complement their already robust lineup was a strategic move to establish their position
of market dominance in the area of personal technology use.
In 1 Timothy 6:17-19, I am particularly drawn to verse 18 which says, “Command them
to do good, to be rich in good deeds, and to be generous and willing to share.” Apple has chosen
to invest in educational needs of students and continually improves their products for the sole
purpose of user experience. The goodwill they have earned in years of commitment to Apple
users set them apart as an competitive company in a very saturated market for personal
technology.
References
Steve jobs, apple, and the limits of innovation. (2004). Research Technology Management, 47(3),
63. Retrieved from http://ezproxy.liberty.edu/login?url=https://search-proquest-
com.ezproxy.liberty.edu/docview/213803634?accountid=12085
What do apple, IBM and P&G know? (2011). Strategic Direction, 27(3), 29-31.
doi:http://dx.doi.org.ezproxy.liberty.edu/10.1108/02580541111109624
BUSI 534 – DB1 6/3/18
Discussion Board 2:
Research a publicly traded company that recently (within the past three years) went IPO (initial
public offering). Discuss the estimation of the company’s stock price prior to the actual IPO
date, the price of the stock on the date of IPO, the price shortly after, and the current price.
Reflecting on what has been learned so far, discuss whether you believe the initial estimation of
value was accurate and why or why not. Do not use first or second person when discussing one’s
opinion. Rather, continue to write in third person.
Families and businesses are familiar with ADT home and business security systems as
ADT has been providing protection for over 140 years to customers across North America. In the
recent years ADT had broadened its spectrum of products to include security use with smart
devices within homes and businesses. After nearly a decade and a half of operating in the private
sector and slowly acquiring smaller security companies in 2016, Apollo Global Management
took ADT private for $6.9 billion in a leveraged buyout and now owns the majority of the shares
along with the Koch brothers. ADT claims its reasons for the initial public offering (IPO) are to
reduce debt obligations and invest in growth opportunities. ADT made the decision to take the
company public on January 18, 2018 to raise about $1.6 billion.
The IPO was prepared at a targeted range of $17-19 per share, but ultimately ADT came
to market with 105 million shares at $14 per share which was well below the initial ranged hoped
for. In evaluating ADT, it is possible that using the income approach for valuation uncovered the
large amount of debt ADT had accumulated over the years through acquisitions and growth
strategies contributing to the decrease in presented stock price of $14. Perhaps it was
strategically lowered to give investors the confidence that ADT wasn’t as risky as it’s financial
statements projected, but rather this was a good purchase as their future growth would more than
compensate for the lower initial IPO price. “The changing risk composition hypothesis,
introduced by Ritter (1984), assumes that riskier IPOs will be underpriced by more than less-
risky IPOs (Loughran & Ritter, 2004).” While the $14 per share was less than the original
BUSI 534 – DB1 6/3/18
amount, the valuation of ADT may have been inflated from relying on customer goodwill and
household recognition and not a fully accurate valuation.
ADT opened at $14 the morning of the IPO and closed at $12.39 losing nearly 12% of the
funds they wanted to raise. The response wasn’t as overwhelming as they had hoped which may
have been related to the riskiness of their company’s financial situation. A highly leveraged
company that operates using debt rather than operating cash flow has a much harder time
overcoming the thresholds required for profitability. In the case of an IPO, companies have to be
fully transparent with investors by preparing financial statements and industry reports
establishing value for their stock price (Herawata, Achsani, Hartovo & Sembel, 2017). The lack
of positive response, most likely was influenced by investors seeing ADT as a low performing
company that had yet to prove itself in the big leagues of public companies. About a month after
the IPO, ADT’s stock settled at around $11.53 per share still a decrease from the initial price of
$14 per share. ADT did experience some changes in management during this time period and it is
possible this affected investors confidence in the stock value of the company. Currently, ADT is
trading at $7.97 and has fluctuated around $8 per share for the past few months. While this is still
a significant decrease from the IPO, ADT hopes that it will being to increase as the implement
more smart home devices and venture into new growth opportunities within their industry.
Proverbs 13:11 tells us that “wealth gained hastily will dwindle, but whoever gathers little by
little will increase it.” As ADT initially wanted to raise funds from the IPO to absolve their debts,
a slow increase in funds would benefit them just as much as a huge inflow of cash from
investors.
Resources
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Herawati, A., Achsani, N. A., Hartoyo, S., & Sembel, R. (2017). IPO COMPANY STOCK
VALUATION ANALYSIS 2000 - 2014. International Journal of Organizational
Innovation (Online), 9(3), 12-72C,73C,74C,75C,76C,77C,78C,79C,80C,81C,82C,83C.
Loughran, T., & Ritter, J. (2004, Autumn). Why has IPO underpricing changed over time?
Financial Management, 33(3), 5+.
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Reply 1
Ian – great discussion on Snapchat! Definitely a very up and coming company with the
millions of users and infiltrating the tech market with their IPO. With the vast majority of its
users falling into the millennial demographic, there is great potential for Snapchat to grow as it is
incredibly popular amount current users. You mentioned some of the challenges it has faced are
gaining paid content on its platform and comparing itself to other tech market companies like
Facebook, Twiter, Google, or Yahoo!. In the fast paced social environment, we live in, tech
companies like this rely on the popularity of their platform and if a new social app replaces them
the possibility of losing market share is eminent especially if the company is publicly traded.
During the valuation of the stock price for IPO, Snapchat set its price lower than what it
gained on opening day. The changing risk composition hypothesis, introduced by Ritter (1984),
assumes that riskier IPOs will be underpriced by more than less-risky IPOs (Loughran & Ritter,
2004). If this was the case for Snapchat, perhaps valuation professionals were not convinced
Snapchat would stack up well against the big tech companies like Google and Facebook. With
less history backing up their valuation, it was risky deal to take Snapchat public. Like any
company issuing risk factors, Snapchat has many questions to answer. Dig under the hood and
the issues pile up quickly. Snapchat has had significant operating losses in its six-year history,
and the future doesn't look profitable anytime soon. (Baldwin, 2017)
A few months following the IPO, Snapchat stock price dropped similar to how Twitter
began dwindling after some time on the market. Evan Spiegel, the CEO of Snapchat, says that
they have an exit plan in case things go south. They are more interested in engagement than
getting big, which other social media companies focus heavily (Reim, 2005). In the valuation
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period, I think their valuation at IPO was correct. They underpriced their stock to get investors to
buy in but took a gamble that the market would respond with great interest and increase the stock
price. It’s interesting to note that currently their stock is trading around the same $14 that they
brought to IPO. The slow decline in stock price may be related to the struggles addressed above.
Monetizing the app and increasing engagement do draw more eyes to Snapchat, and to be
financially successful, they need to find a way to match that with paid content from other
companies. Overcoming the extreme losses identified in their financial statements also proves to
be a factor investor consider. Raising funds through an IPO to cover debts and losses may be a
temporary patch to cash hemorrhage, but Snapchat needs to establish a more effective operating
strategy with the new funds from investors to avoid market failure.
Baldwin, G. (2017, 04). The banana republic of snapchat. Modern Trader, , 16-23.
Loughran, T., & Ritter, J. (2004, Autumn). Why has IPO underpricing changed over time?
Financial Management, 33(3), 5+.
Reim, G. (2015, June 1). Snapchat CEO sends message to market on IPO: Evan Spiegel sees
risks of going public with looming correction. Los Angeles Business Journal, 37(22), 12.
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Reply 2
Jordan, thanks for your sharing your insight on Trivago! It has been only a short time
since their IPO and the stock price is already a 50% loss from the original opening price.
Currently, Trivago is controlled by Expedia a larger travel company that finds the best matches
on flights, rental cars and hotels. One of the best ways Trivago has entered the travel industry is
by joining Priceline, Kayak, and Expedia by developing an application for smart phones. As
more users search for travel plans online connecting through their smart phones provides Trivago
the opportunity to meet users right where they spend most of their time. Part of the valuation
planning was done by expressing the company’s culture as a valuable part of their company.
Their method for predicting earnings was based on user engagement and website views as they
have no assets. The market approach to valuation would have primarily been used in preparing
for this IPO as the only basis for valuation is the market response to Trivago’s website and
algorithm for matching travel destinations and hotel stays. Their model for monetizing their
website is based on clicks not bookings so advertising and the algorithm are the primary base for
valuation. The amount of money the company plans to raise in its first IPO is to calculate
registration fees (National Post, 2016)
Another player in the travel technology marketspace is AirBnB. As people have become
more comfortable staying in people’s private residences while travelling and paying less than the
hotel premium prices, hotel sites like Trivago and Priceline are seeing less site visitors. This rise
is examined through the lens of disruptive innovation theory, which describes how products that
lack in traditionally favored attributes but offer alternative benefits can, over time, transform a
market and capture mainstream consumers (Guttentag, 2015) Investors need to consider the
outside factors influencing the stock price of Trivago. These competing companies within the
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market place challenge Trivago to get views and clicks on their web content. As smart phone
applications become more popular for travel plans companies like Trivago have to adapt to the
demand for quick hotel planning. I think the valuation of Trivago was conservative at IPO and as
larger competing companies like AirBnB and VRBO have changed the dynamic of normal travel
planning and in order to compete Trivago needs to meet the market demands perhaps by
integrating similar offers as AirBnB and VRBO.
Psalm 18:36 says that “You gave me a wide place for my steps under me, so they could
travel by day or night.” Travel customers trust companies like Trivago to provide a highly
recommended hotels and rely on the algorithm to match them with the best night’s stay.
Trivago plans IPO of up to US$400M. (2016, Nov 15). National Post
Guttentag, D. (2015). Airbnb: disruptive innovation and the rise of an informal tourism
accommodation sector. Current Issues In Tourism, 18(12), 1192-1217.
doi:10.1080/13683500.2013.827159
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Discussion Board 3:
Discuss one USPAP (Uniform Standards of Professional Appraisal Practice) Business Valuation
Standard and how that standard may apply to a given circumstance in a business valuation
engagement.
Valuation professionals are required to follow the Uniform Standards of Professional
Appraisal Practice (USPAP) adopted by the Appraisal Foundation in 1989. The purpose for
adopting these standards was to regulate appraisal services, including real estate, personal
property, business and mass appraisal. Evaluations, as explained in the Interagency Appraisal and
Evaluation Guidelines, are market value opinions that may be provided by individuals who are
not state licensed or certified appraiser (Austin, 2013).” As years have passed, these standards
have changed and valuation professions must be aware of the changes applicable to the assets
they are evaluating.
USPAP Standard 3 is a dual performance-based standard that obligates the appraiser to
perform the appraisal from the perspective of development and reporting establishes
requirements for development and reporting of an appraisal review assignment involving a real
property or personal property appraisal. In developing a review, valuation professionals
determine the problem to be solved and the scope required to research and satisfy the problem. In
reporting, the appraiser delivers an analysis of the problem and gives an opinion regarding the
review. A high level of information is required by Standard 3 and ensures that valuation
professionals include all relevant information to the appraisal. Often this applies to reviewers
who can be hired by the client to give an opinion on another appraiser’s work to ensure
completeness and accuracy. The importance of a clear, reviewed, and through opinion guarantees
the client an accurate valuation.
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Within Standard 3 there are seven rules; the first three address development and the later
address reporting. Competency and diligence describe the first three rules relative to
development of the appraisal. Following the intended use, appraises need to establish the purpose
for the review in developing an opinion of value. Examining all “what if” scenarios allow
appraisers to develop a stronger opinion based on multiple conditions. The general reporting
requirements list that the appraiser clearly articulate either written or oral their opinion of the
appraisal review report and at minimum includes the time frame in which the review was
conducted. All material items must be evaluated and disclosed in the review and be certified by
the reviewer for completeness.
Weinberger discusses a case that was presented to the Court of Appeals of Connecticut in
2014. The trial court sought to rightfully determine if the evidence submitted in the appraisal was
admissible in court. Because there was a large sum of debt involved in the case, the appraisal
report was necessary evidence. By appealing to the judge, the defendant expected that the real
estate appraisal report would be for internal use only and not scientific evidence; however, the
admissibility standard was overruled. Factors that played an important role in this lawsuit were
the credibility, timeliness, and material contribution to the appraisal (Weinberger, 2014).
As Christians, we should develop a set of personal standards that align with our faith in
Jesus Christ. Following His truth and guidance for our lives sets us apart in this world. 2 Timothy
3:16 says, “All Scripture is breathed out by God and profitable for teaching, for reproof, for
correction, and for training in righteousness.” Abiding by the standards outlined in scripture we
can live a wholesome, successful life in our Christian walk.
BUSI 534 – DB1 6/3/18
References
Austin, C. (2013). Appraisal institute releases guide note 13: Performing evaluations of real
property collateral for lenders. The Appraisal Journal, 81(2), 173-179.
Weinberger, A. M. (2014, Spring). In Connecticut, court has discretion to admit appraisal report
that does not satisfy Uniform Standards of Professional Appraisal Practice. Appraisal
Journal, 82(2), 104+.
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Reply 1
Ian, thanks for your sharing your insight on USPAP Standard 3! My discussion this week
was also on Standard 3 and we share some similar thoughts. The overarching theme of all the
USPAP standards is the importance of credibility, timeliness, and quality of the reports submitted
to the reviewer. Developing a sound appraisal without bias is imperative for both the client and
appraiser as the final report determines the value of a company. This final report can be the
determining factor in a settlement, ownership transfer, or buyout. Writing a clear, concise report
is just as important as including the facts that set the company apart from its competitors. Using a
side by side industry comparison can allude to the client company being more successful or more
financially stable.
For credibility, including financial statements to back up the claims made in the appraisal
allows valuation consultants for the buyer to have a full look at the financial background and
foundation used to develop the valuation. Establishing a thorough report based on solid
financials can help an appraisal stand out to a buyer. The USPAP standards were introduced to
create guidelines for all valuation projects. Evaluations, as explained in the Interagency
Appraisal and Evaluation Guidelines, are market value opinions that may be provided by
individuals who are not state licensed or a certified appraiser (Austin, 2013).” Examining all
“what if” scenarios allow appraisers to develop a stronger opinion based on multiple conditions.
The general reporting requirements list that the appraiser clearly articulate either written or oral
their opinion of the appraisal review report and at minimum includes the time frame in which the
review was conducted.
You reference credibility in your discussion and I think this is something valuation
profession need to strive for when developing an appraisal. It’s one thing to have valid
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information, but another to establish their credibility. Buyers are more interested in credible
financial reports, rather than good looking financials that have little to know historical data
included. For example, determining the value of a company that has been in business for 20
years verses a company that open less than a year ago gives the appraiser much more data to
evaluate. Apparently, SSVS uses the term "Representation" because accountants have
traditionally used "certification" in a technical sense in connection with the accuracy of financial
statements (Liberman and Anderson, 2008). The difference between these two words means that
accountants merely represent the financials, but not fully certify that they are indeed accurate.
Evaluators should take care that they accurately “represent” the information given by a company
to develop a fair a and accurate valuation report.
As Christians, we should develop a set of personal standards that align with our faith in
Jesus Christ. Following His truth and guidance for our lives sets us apart in this world. 2 Timothy
3:16 says, “All Scripture is breathed out by God and profitable for teaching, for reproof, for
correction, and for training in righteousness.” Abiding by the standards outlined in scripture we
can live a wholesome, successful life in our Christian walk.
Austin, C. (2013). Appraisal institute releases guide note 13: Performing evaluations of real
property collateral for lenders. The Appraisal Journal, 81(2), 173-179.
Lieberman, M. J., & Anderson, D. (2008, January). Will the real business valuation standards
please stand up? The AICPA's SSVS compared to USPAP and other business valuation
standards. The CPA Journal, 78(1), 22+.
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Reply 2
Lydia, thanks for sharing your insight on the USPAP discussion this week! It is different
to evaluate what we are learning in the text and apply it with the standards as a guideline for
development and review. One of the things I noticed in my research and readying your thread,
was how accountants are required to analyze and present highly complex financial reports with
great conciseness and clarity. The USPAP developed standards for which all valuation
professions are required to follow when preparing an appraisal. This helps both the client and all
parties involved understand the nature of the business relative to its valuation. An overly
complex valuation report with overwhelming data may be accurate and inclusive of all valuable
information, but too difficult to understand without a highly trained accounting background.
You mentioned that adjusting financial statements is sometimes necessary during the
valuation process. While, yes this is applicable if it captures underlying economics; improves
comparability by aligning accounting principles or reflect estimates or assumptions that we
believe are more appropriate for credit analysis in a company' s particular circumstances (Dillow,
2016), it is not always necessary to adjust but merely to consolidate and revise the information to
reflect only the most important data from the financial statements. For credibility, including
financial statements to back up the claims made in the appraisal allows valuation consultants for
the buyer to have a full look at the financial background and foundation used to develop the
valuation. Establishing a thorough report based on solid financials can help an appraisal stand
out to a buyer. The USPAP standards were introduced to create guidelines for all valuation
projects.
Examining all “what if” scenarios allow appraisers to develop a stronger opinion based
on multiple conditions. Despite these efforts, scope of work remains an elusive concept and the
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flexibility allowed by USPAP is still not readily evident to many appraisers (Boyle, 2004). Some
appraisers’ express frustration about the USPAP standards because they are overly complicated
and have so many requirements. By reducing the standards to their simplest form and only
looking at the “bottom line” requirements, valuation professionals find it easier to follow the
outline presented by the USPAP standards. A high level of information is required by Standard 3
and ensures that valuation professionals include all relevant information to the appraisal. Often
this applies to reviewers who can be hired by the client to give an opinion on another appraiser’s
work to ensure completeness and accuracy. The importance of a clear, reviewed, and through
opinion guarantees the client an accurate valuation.
Scripture teaches business owners to consider their services and to consider that their
reputation is the reputation of Christ. “Whatever you do, work at it with all your heart, as
working for the Lord, not for human masters (Colossians 3:23).” The Lord is the one who is to
judge and we are called to show love to others regardless of their responses to us.
Boyle, T. D. (2004). USPAP-the bottom line: What to do, what to write. The Appraisal
Journal, 72(4), 324-331.
Dillow, K. Berchmann, K. (2016, December 21). “Financial Statement Adjustments in the
Analysis of Non-Financial Corporations”. CREDIT STRATEGY AND STANDARDS.
BUSI 534 – DB1 6/3/18
Discussion Board 4:
Discuss one issue presented in the text and, utilizing external sources, how that issue has applied
to a real-world company, court case, or professional practice.
As Wiley has discussed throughout the text, the are multiple uses for valuation services.
Professional practices are valued for similar reasons as other businesses, acquisitions, mergers,
buyouts, divorce, or succession planning. There are many practical reasons for determining the
appraised value as changes in business structure happen all the time. For this discussion,
valuation of architect and engineering (AE) firms will be the main focus. One of the most
valuable assets a professional services company has is goodwill and intangible assets unlisted on
the balance sheet. Determining those values can be crucial to the overall appraisal results
because they set a company apart from its competitors. While the term “intangible assets” is
often used loosely to reflect any source of knowledge capital it is useful to clarify the exact
contend of recognized intangibles (Makrominus, 2017). A company’s name, reputation, customer
loyalty, location, and products can be considered as elements of goodwill. Most professional
service companies like law, CPA, or engineering firms only have cash, accounts receivable, and
building assets to include in the valuation process.
AE firms in particular are challenged to determine the true value of their assets because
they do not have products or physical assets to include in an appraisal. Some professionals
include software licensing, designs, patents and license agreements as intangible assets. Other
intangibles can include research and development (R&D) that a company has gathered over the
years. It is the knowledge, creativity, intellectual property and design background that make an
AE firm set apart in the industry. The value of the design documentation and historical
components is what determines the value of an engineering firm (Reilly, 2015). The most
common way to determine the fair value of an AE firm is to use the market approach and
BUSI 534 – DB1 6/3/18
compare transactions of similar firms. Two common formulas can help determine book value and
earnings before interest, depreciation, taxes and amortization (EBITDA); 1.5 times book or 3 to
4 times EBITDA. These calculations can give appraisers a quick overview of what the company
could be worth before evaluating the intangible items as listed before.
Recently, my employer sold a subsidiary of our corporate SA office to a private equity
firm. APT was operated independently and had established a very healthy client base so this was
cash only transaction with a valuation only based on its assets. In the process of determining the
valuation, SA hired an external valuation firm to provide the valuation portfolio we were
prepared to share with the buyer. APT is an engineering company that builds and designs puck
handling technology for automation systems and has multiple design patents on those machines.
It was important that the appraisers included the value of those designs in the valuation because
while they are intangible assets, they do hold value to the company.
As Christians, we should develop a set of personal standards that align with our faith in
Jesus Christ. Following His truth and guidance for our lives sets us apart in this world. 2 Timothy
3:16 says, “All Scripture is breathed out by God and profitable for teaching, for reproof, for
correction, and for training in righteousness.” Abiding by the standards outlined in scripture we
can live a wholesome, successful life in our Christian walk.
Resources
Makrominas, M. (2017). Recognized intangibles and the present value of growth
options. Review of Quantitative Finance and Accounting, 48(2), 311-329.
Reilly, R. F. (2015). VALUATION OF ENGINEERING INTANGIBLE ASSETS. Construction
Accounting & Taxation, 25(2), 10-21.
BUSI 534 – DB1 6/3/18
Reply 1
Ken, thanks for your sharing your insight on goodwill in this week’s discussion board! I
discussed a similar topic this week, overviewing the intangible assists valuation for professional
firms like CPA, law firms or engineering companies. A common definition of goodwill is the
residual value of all the synergies of a functioning business that cannot be specifically identified
with any other intangible factor. A company’s name, reputation, customer loyalty, location, and
products can be considered as elements of goodwill. You mentioned in your post that the
Financial Accounting Standards Board had recently made a change in the accounting standards.
This conversion of goodwill to assets during an acquisition does complicate matters for
companies that could potentially lose money due to the reclassification of assets. The most
straight forward approach is to value a business utilizing the conventional cost approach, market
approach, or income approach and then subtract the value of the identifiable assets. The
remaining residual value would represent the goodwill of the business which is what this
discussion is regarding (Trevino, 2015).
The new accounting rules have had a substantial effect on financial statements, as
evidenced by an analysis of the 100 public companies with the largest reported goodwill
balances. One-third of these 100 companies wrote off about 30% of their goodwill when they
transitioned to SFAS 142 (Huefner & Largay, 2004). Changes of this size will have an impact on
the financial statements as trends and forecasting future profitability will be much more difficult
to calculate. Goodwill amortization is a non-cash expense that provides no tax benefit for
corporations as in the pro forma income statements add back depreciation and amortization to net
income. Another factor to consider is the impact of this reclassification of goodwill on a
company’s stock price. P/E ratios decrease as increases in earnings affect this ratio, effectively
making the stock look cheaper even if there was no change in the intrinsic earnings of a
BUSI 534 – DB1 6/3/18
company. Large companies like GE, Kraft, and Time Warner all have included notes in their
financial statements to further explain to investors and shareholders that the restatement of
goodwill as an asset on their balance sheet. By sharing this information, it increases credibility
and transparency between a company and its shareholders.
Scripture teaches business owners to consider their services and to consider that their
reputation is the reputation of Christ. “Whatever you do, work at it with all your heart, as
working for the Lord, not for human masters (Colossians 3:23).” The Lord is the one who is to
judge and we are called to show love to others regardless of their responses to us. Abiding by the
standards outlined in scripture we can live a wholesome, successful life in our Christian walk.
Huefner, R. J., & Largay,James A., I.,II. (2004). The effect of the new goodwill accounting rules
on financial statements. The CPA Journal, 74(10), 30-35.
Trevino, G. A., PhD. (2015). Internally generated intangible assets and the value of personal
goodwill. American Journal of Family Law, 28(4), 176-179.
BUSI 534 – DB1 6/3/18
Reply 2
Paul, thank you for sharing your thoughts on this week’s discussion board! The valuation
of marital assets and personal goodwill is something divorce attorney’s face weekly as clients
want an even distribution of assets in a marital dispute ending in divorce. Often family-owned
company property is involved in asset distribution settlement cases as well. In addition to the
division of assets during a divorce, analysts are often asked to value the closely held company
for taxation-related controversy reasons--including gift tax, estate tax, generation-skipping
transfer tax, income tax, and property tax disputes (Reilly, 2016). Personal goodwill represents
intangible economic characteristics and the related intangible asset value that is attributable to an
individual's reputation, specific skills and knowledge, personal relationships, judgment,
expertise, experience, personality, past success and management style. A common definition of
goodwill is the residual value of all the synergies of a functioning business that cannot be
specifically identified with any other intangible factor. A company’s name, reputation, customer
loyalty, location, and products can be considered as elements of goodwill.
The tax impact of personal goodwill does affect C Corporations as the rule of double
taxation follows the corporate tax rate and then again at the shareholder level. If personal
goodwill is not included in the sale price, the gain associated with sale is only taxed once. For the
purposes of selling a corporation with a sizable amount of goodwill, this could prove to be a very
good strategy to avoid paying extra taxes (Herman & Devereux, 2018). Tax and economics do
play a large role in determining the asset distribution of goodwill. An example from Herman and
Devereux is a corporation owned by two individuals. Upon valuation, the appraiser determined
that while it was a fifty-fifty joint ownership, $1 of the sale price was goodwill. Owner 1 was to
BUSI 534 – DB1 6/3/18
receive 75% of the goodwill and Owner 2 would receive 25%. Carefully evaluating the corporate
and personal assets in the sale of a corporation is very important if tax liabilities are to be
limited. It is important to note that goodwill cannot be transferred; however, the rights to one’s
goodwill can be transferred if they signed a non-compete agreement upon gaining employment
by that corporation.
As Christians, we should develop a set of personal standards that align with our faith in
Jesus Christ. Following His truth and guidance for our lives sets us apart in this world. 2 Timothy
3:16 says, “All Scripture is breathed out by God and profitable for teaching, for reproof, for
correction, and for training in righteousness.” The Lord is the one who is to judge, and we are
called to show love to others regardless of their responses to us. Abiding by the standards
outlined in scripture we can live a wholesome, successful life in our Christian walk.
Herman, A. J., & Devereux, M. J., II. (2018, February). Molding Personal Goodwill.
MoldMaking Technology, 21(2), 38.
Reilly, R. F. (2016, Fall). Distinguishing personal goodwill in family-owned company valuations.
American Journal of Family Law, 30(3), 159+.
