(Washington, DC) February 20, 2019—The Appraisal Foundation, the nation’s foremost authority on the valuation profession, issued its fourth Valuation in Financial Reporting (VFR) advisory today on contingent consideration. The purpose of this valuation advisory is to outline best practices in the valuation of contingent consideration, which is a technical concept that quantifies how expectations regarding certain future events impact the valuation of a future payment that is dependent on those future events. While this valuation advisory is voluntary, it provides business valuation professionals, and those who use their services, with reasonably consistent and supportable fair value conclusions.
“Today’s valuation advisory is a step forward in enhancing the public’s trust in business valuation,” said Alok Mahajan, one of the advisory’s lead authors and Working Group chair. “Users of business valuations, such as chief financial officers, chief development officers and auditors, can now have a better understanding of the applications used when valuing businesses to be bought or sold. By making this more transparent, we are demystifying the black box of contingent consideration.”
The need for this valuation advisory increased after 2009 when basic accounting rules were changed and contingent consideration needed to be fair valued. This VFR represents one of the only financial reporting valuation practice aids focused on valuation of options/real options. Because of this, the applications of the concepts extend beyond just contingent consideration.
“The Appraisal Foundation wishes to express its utmost gratitude to the Working Group for volunteering their time and expertise,” said The Appraisal Foundation President David Bunton. “This was a major undertaking by a group of senior professionals from major accounting and valuation firms that will lay the groundwork for future valuation advisories. They have raised the bar for greater consistency and understanding that will benefit all business professionals.”
The Appraisal Foundation has issued three prior VFR advisories on topics such as the identification of contributory assets and calculation of economic rents in 2010, the valuation of customer related assets in 2016, and the measurement and application of market participant acquisition premiums in 2017.
About The Appraisal Foundation
The Appraisal Foundation is the nation’s foremost authority on the valuation profession. The organization sets the Congressionally-authorized standards and qualifications for real estate appraisers, and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals. This work advances the profession by ensuring appraisals are independent, consistent, and objective. More information on The Appraisal Foundation is available at www.appraisalfoundation.org.