The Appraisal Practices Board released a discussion draft concerning “The Measurement and Application of Market Participant Acquisition Premiums.” Increased interested in identifying and recognizing the fair value of assets and liabilities in financial statements prompted the most recent exposure draft. 

“Because of the need for financial statements to be both reliable and relevant, valuation practices must provide reasonably consistent and supportable fair value conclusions,” the APB wrote. “To this end, it is believed that guidance regarding best practices surrounding certain specific valuation topics would be helpful.”

The four areas where Work Groups, sponsored by The Appraisal Foundation, focused their attention were: contributory assets and charges in a document titled “The Identification of Contributory Assets and Calculation of Economic Rents;” customer-related assets; control premiums as applied in valuations done for financial reporting purposes; and valuing contingent consideration.

The extensive 55-page document covers everything from business characteristics influencing market participant acquisition premium to analytical methods and the fair value context. In the end, the Working Group introduced the term market participant acquisition premium (MPAP) to represent the difference between (1) 1208 the pro rata fair value of the subject controlling interest and (2) its foundation. 

“The Working Group believes that valuation specialists most commonly associate the foundation with the pro rata fair value of marketable, non-controlling interests in the enterprise,” the APB wrote. “While this describes an MPAP Equity Foundation concept, a Total Invested Capital [TIC] Foundation may be more appropriate sometimes. The Working Group believes that best practices include expressing as well as applying the MPAP in the context of a TIC Foundation.”

The Working Group went on to explain the complications, stating “exclusive reliance on observed premium data from completed transactions provides, in most cases, insufficient support for a concluded MPAP. Nonetheless, observed transaction premium data may be valuable. Certain key points regarding the observed premium data are called out that indicate a greater need for detailed analysis. Exclusive reliance on observed transaction premiums without careful analysis of the subject entity’s relative financial performance, valuation multiples and other metrics can result in an unreliable fair value measurement.”

You can find the full document on The Appraisal Foundation website and all comments can be submitted to [email protected].