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Andrew McDonnell CPA ABV PFS CFF CVA Crfa MAFF, 4101 N State Line Avenue, Texarkana, TX (2026)

01/30/2023

Why do so many older adults choose Medicare Advantage?
KATE ASHFORD
NERDWALLET

In 2022, 48% of Medicare beneficiaries were enrolled in Medicare Advantage plans instead of original Medicare, and experts predict that number will be higher in 2023.

Medicare Advantage plans are offered by private insurers and bundle Medicare benefits in a way many people find appealing — but they also limit care to network providers, often require preapproval to see specialists and can saddle beneficiaries with high outof-pocket costs for serious conditions.

The number of older adults in Medicare Advantage is also notable because financial experts tend to recommend original Medicare with medigap.

“I help my clients with Medicare choices, and what I tell them all is that if you can afford it, you should sign up for traditional Medicare with a Medicare supplement plan,” says David Haas, a certified financial planner in Franklin Lakes, New Jersey.

So why do so many people turn to Medicare Advantage for their health care in retirement? Here are the main factors.

MEDICARE ADVANTAGE IS OFTEN FREE

In 2023, 66% of Medicare Advantage plans with prescription drug coverage have no premium — versus medigap, which has a monthly premium. If you have no health issues, the choice can seem like a no-brainer.

“Medicare Advantage is extremely attractive when you’re healthy,” says Leslie T. Beck , a certified financial planner in Rutherford, New Jersey. “But when something happens — and something always happens — and you’re in a Medicare Advantage plan, you can’t switch back. You can switch into regular Medicare, but you’ll never get a medigap policy.”

PLANS ARE BUNDLED

With original Medicare, people must juggle individual pieces of coverage — Part A, Part B, Part D, medigap — but Medicare Advantage offers one-and-done simplicity: There’s one premium for everything.

Although choosing a Medicare Advantage plan feels simpler, it means you must shop again for coverage every open enrollment. “You have to include the prescription drug coverage and the doctor coverage, and you have to make this choice every year,” Haas says.

With original Medicare, Haas says, “(Y)ou do need to choose a new Part D plan, but you don’t need to reopen your entire medical equation every year the way you do with Medicare Advantage.”

MEDICARE ADVANTAGE OFFERS EXTRAS

Many Medicare Advantage plans offer additional benefits, such as money toward dental or vision care, which isn’t covered by original Medicare. About 1 in 4 people say extra benefits pushed them to choose Medicare Advantage, according to a survey by the Commonwealth Fund, a health care think tank.

“Medicare Advantage plans are heavily marketed and tout how they include all of the other services not available with medigap — prescription drug plans, subsidized health club dues, dental and vision,” says George Gagliardi, a certified financial planner in Lexington, Massachusetts. “So it seems to many people like too good of a deal to turn down.”

But the extra benefits offered by Medicare Advantage are generally pretty limited, and experts say choosing a health plan for the dental coverage and gym membership is missing the point of insurance.

“It’s not about paying for the little piddly expenses that you have,” Beck says. “It’s paying for the catastrophic expenses.”

THEIR FRIENDS CHOSE MEDICARE ADVANTAGE

Many older adults choose a Medicare Advantage plan because someone they know chose one.

“We tend to get a snowball effect,” says Andrew T. Cook, a certified financial planner in Timonium, Maryland. “One retiree made the decision, they talk to another retiree, who talks to another one, and that groupthink often leads them to conclude that if they all made the decision independently, it must have been the right decision.”

But Medicare is an area in which retirees should go beyond friends for advice. If a financial planner isn’t an option, each state has a State Health Insurance Assistance Program, or SHIP, where people can get free, unbiased guidance. Visit shiphelp.org to find a program.

MEDICARE ADVANTAGE ADS ARE EVERYWHERE

“When you talk about advice on what’s better for individuals, it’s really whose voice is the loudest and the most persistent,” Beck says. “If you’ve ever watched any late-night TV, it’s just ad after ad for Medicare Advantage.”

In addition to being prolific, the ads are increasingly misleading. Growing complaints about Medicare Advantage advertising have led the Centers for Medicare & Medicaid Services to now require that insurers get approval from federal regulators before airing television ads.

“I watch those ads very carefully, and they basically conflate Medicare with Medicare Advantage,” Beck says. “It’s rare that they mention ‘Medicare Advantage.’”

This article was provided to The Associated Press by the personal finance site NerdWallet. Kate Ashford is a writer at NerdWallet. Email: kashfordnerdwallet.com . Twitter: kateashford.

08/13/2021

What is Cryptocurrency?

How Does it Work?

Everyone seems to be talking about cryptocurrency these days, but many are unsure how to define it and fewer still, know exactly how it works. Cryptocurrency is a digital construct without physical substance; the only evidence of its existence is the digital record or ledger indicating balances held (like a balance sheet) and transactions that have occurred (like an income statement). What follows is a basic primer on how cryptocurrency works and how it differs from physical currencies.

Why Does it Have Value?

Like many physical currencies across the world, it has value because people agree it has value, are willing to use it as a measure of the value of goods and services, and most importantly, willing to accept it in exchange for those goods and services. The U.S. dollar used to be backed by gold; each Federal Reserve Bank was required to hold a gold certificate for at least 25 percent of its Federal Reserve note liability. The gold certificates represented gold held by the U.S. Treasury. In March 1968, President Johnson removed that requirement, which was sometimes referred to as the “gold cover,” and in August 1971, President Nixon suspended the ability to convert U.S. dollars into gold in international transactions, thus completely ending the gold standard that had been the backbone of global monetary systems for centuries. Nevertheless, the dollar retains value because it is still accepted in exchange for goods and services. Currently, the U.S. dollar is the world’s de facto reserve or global currency despite a lack of backing by gold reserves.

Today, the major physical currencies trade on global currency exchanges and their value relative to each other is determined by supply and demand and by the stability of the issuing government. The government-issued currencies not backed by a commodity like gold are sometimes referred to as fiat currencies. Most modern paper currencies like the U.S. dollar and the euro are fiat currencies.

These physical currencies, issued and regulated by governments, handle transactions through a banking system that includes private online payment platforms like PayPal. Digital currencies are not issued or regulated by any government; they are privately issued and tracked on a public digital ledger via an algorithm.

How is Cryptocurrency Used to Pay for Purchases?

Using cryptocurrency for purchases is very much like using your debit card, making an electronic payment from your bank account, or using a payment platform like PayPal or Venmo. The money is tracked digitally without a physical exchange of currency, and it is transferred between user accounts. The key difference lies in how the transaction is handled and tracked. Debit cards, electronic payments, and payment platforms all maintain a private record of transactions and account balances through an intervening entity like a bank or payment platform. Cryptocurrency is exchanged directly between users (so-called “peer-to-peer”), without the typical intermediary, using a public transactional ledger that is not controlled by any one entity or person. That public ledger and the technology behind the tracking are both referred to as blockchain.

Cryptocurrency Transactions and the Blockchain Ledger

The digital public ledger containing all the transaction data and balances is secured by cryptography, meaning all transactions are securely encrypted. It is both a decentralized and distributed process. Decentralized because it is controlled by the users and the algorithm; distributed because the blockchain ledger is hosted on many computers across the world. Besides being used for purchases, cryptocurrency is also traded on exchanges just like physical currencies.

Transactions are sent using cryptocurrency wallets, which is actually software used to send the transaction between peers. The person initiating the transaction uses the software to transfer the specified balance from one account to another. To actually make the transfer to another account, it is sent to a public address using a private key associated with the account. These transactions are encrypted and broadcast to the cryptocurrency network where they remain until they are added to the public ledger through a process known as “mining,” which I will explain in the next section. Many transactions are added at once in sequential blocks, which is where the term blockchain originated—the ledger is literally composed of a chain of blocks of transactions. (Please note that some altcoins, which are alternatives to Bitcoin, feature totally private transactions and some do not use blockchain technology to secure transactions.)

All users of a specific cryptocurrency can gain access to the ledger by downloading software referred to as a full node wallet, or they can choose to use a third-party like Coinbase to track their cryptocurrency. While the cryptocurrency transaction amounts are public, the parties involved are not. Each transaction has a unique set of keys and whoever has the keys owns the associated amount of cryptocurrency, which is why it is vitally important to store multiple copies of the keys in safe places. There is no other way to retrieve your cryptocurrency unless you are using a custodial service like Coinbase that tracks your cryptocurrency for you.

The Technology Behind Blockchain

Cryptocurrency transactions are sent out to all users hosting a copy of the blockchain ledger. Users who are referred to as “miners” use software to solve a cryptographic puzzle in order to unlock the transactions and add a block of transactions to the ledger. Whoever figures out the puzzle and unlocks the transactions first, earns a few “mined” coins for his or her efforts and also gets the transaction fees paid by the originators of the transactions, hence the term cryptocurrency mining. Alternately, miners can combine their computing power to solve the puzzle collectively and share the newly mined coins. The algorithm guarding these transactions requires consensus. If the majority of those trying to solve the cryptographic puzzle all submit the same transaction data, the consensus provides confirmation that the transactions are correct, and they can then be added to the ledger.

Another level of security is added using encrypted connection data. Each block of transactions shares a connection to the previous block via one-directional encrypted codes called hashes. The distributed nature of the ledger, the consensus required, and the difficulty of solving the various cryptographic puzzles all contribute to making tampering with the ledger extremely difficult. The awarding of new coins and transaction fees incentivize the miners to do the important work of ensuring both the continuity and integrity of the ledger. Because of the monumental effort and consensus required to manipulate the ledger, blockchain is among the most secure transactional data capture methods available.

The keys themselves also use public-key cryptography; a type of one-way cryptography similar to that used by the hashes. The transaction data is tokenized, another form of one-way encryption that points to the data but does not contain all the original data. Thus, cryptocurrency uses cryptography that is easy to decipher one way, but difficult to decipher the other direction without keys. The idea is it is easy to create a strong encryption from the originator’s end, but exceedingly difficult to break that encryption without the assistance of the keys. Think of the keys as the Rosetta Stone for the encrypted data.

Custodial vs. Non-Custodial Wallet Services

There are two different types of wallet services available: custodial and non-custodial. Most of the cryptocurrency exchanges, brokerages, and trading platforms are custodial. They are third-party systems that protect customer assets within their system, which is very similar to the function of a bank. Coinbase is a popular service that is both an exchange and a brokerage and allows its customers to store cryptocurrencies within their own wallets. The advantage of a custodial service is it will track your cryptocurrency for you and you will not have to worry about losing a private key, and thus, all access to your cryptocurrency. The disadvantage is they have control of your funds and can halt transactions so you can neither send nor receive cryptocurrencies. Granted, there is usually a good reason for them to suspend transactions but still, they are in control, not you.

Non-custodial wallet services, by contrast, are the exact opposite. The customer is fully in charge of his or her wallet and is issued a private key, which the customer must secure. If the private key is lost, all access to the cryptocurrency is lost. The customer also is responsible for ensuring the overall safety of the funds.

The History and Volatility of Bitcoin

Bitcoin, the original cryptocurrency, can be traced back to a whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” that was published under the pseudonym “Satoshi Nakamoto” and posted to a cryptography mailing list on October 31, 2008. Previous to that, in August of 2008, an unknown person or entity registered the Bitcoin.org domain. The first block, called the genesis block, was mined on January 3, 2009. The first test transaction took place about one week later. Then on January 8, 2009, the first version of Bitcoin was publicized, and Bitcoin mining began soon after that.

The first transaction with actual economic consequences would not take place until October 12, 2009, when a Finnish developer, who helped the Bitcoin founder work on Bitcoin, sold 5,050 Bitcoins for $5.02, establishing a value of $0.0009. These initial transactions had somewhat arbitrary values; it was not until Bitcoin started to be traded on exchanges (symbol: BTC) and businesses started to accept Bitcoin as a form of payment that Bitcoin gained serious credibility. So much so that in mid-December 2017, Bitcoin reached a then-high of nearly $20,000 per Bitcoin before retreating, but in 2020, prices reached an all-time high of over $60,000! Recent Bitcoin prices have hovered around $35,000 to $40,000.

Bitcoins are divisible into smaller units known as satoshis—each satoshi is worth 0.00000001 Bitcoin. These fractional Bitcoins make cryptocurrency investing more affordable and thus, stimulate demand—similar to the bump in trading that usually occurs after a stock-split and which typically serves to drive stock prices up. While Bitcoin tends to be more resilient than gold and fiat currencies, it can still be volatile and carry significant market risk.

The total available supply of Bitcoin is finite, limited to 21 million total. New coins are being released daily but at some point, the cap will be reached. Bitcoin is projected to hit that limit around 2140, but the actual amount in circulation will be much lower due to the amount of Bitcoin “lost” every year by people who have lost their keys and thus, access to their Bitcoin. (Studies indicate that up to twenty percent of the issued supply may be inaccessible to its owners.) At that point, demand could very well exceed supply or perhaps channel the demand into other cryptocurrencies.

Summary

To summarize the key features of cryptocurrencies:

They are digital rather than physical. In that respect, they are like using a debit card, making an electronic payment, or using a payment platform like PayPal or Venmo.

Digital currencies are not issued or regulated by any government; they are privately issued and tracked on a public digital ledger via an algorithm.

Cryptocurrency is exchanged directly between users using a public transactional ledger that is not controlled by any one entity or person. The public ledger and the technology behind the tracking are both referred to as blockchain.

The blockchain ledger is both decentralized and distributed. Decentralized because it is controlled by the users and the algorithm; distributed because the blockchain ledger is hosted on many computers across the world.

Transactions are sent using cryptocurrency wallets, which is software used to send the transaction between peers. The person initiating the transaction uses the software to transfer the specified balance from one account to another.

Transactions are added to the blockchain in sequential blocks—the ledger is literally composed of a chain of blocks of transactions, hence the name.

Cryptocurrency miners use software to solve a cryptographic puzzle to unlock the transactions and add a block of transactions to the ledger. Whoever figures out the puzzle and unlocks the transactions first, earns a few “mined” coins for his or her efforts and also gets the transaction fees paid by the originators of the transactions, a process known as cryptocurrency mining.

The use of cryptography is vital to the functioning of the blockchain. Each transaction has a unique set of keys and whoever has the keys owns the associated amount of cryptocurrency.

Blockchain is among the most secure transactional data capture methods available. The distributed nature of the ledger, the consensus required, and the difficulty of solving the various cryptographic puzzles all contribute to making tampering with the ledger extremely difficult.

Custodial wallets use third-party systems to manage the cryptocurrency. Risk is reduced but control is sacrificed. Non-custodial wallets mean the customer has total control but also bears all the risks.

Besides being used for purchases, cryptocurrency is also traded on cryptocurrency exchanges just like physical currency exchanges.
Bitcoin is the original cryptocurrency, and its prices can be very volatile. It can be traded in fractional units called satoshis, which helps to stimulate demand when Bitcoin’s price is high.

The supply of Bitcoin is finite, limited to 21 million units. Studies indicate that up to twenty percent of issued Bitcoin may be “lost” or inaccessible to its owners.

Cathy Roper, CPA, ABV, CVA, CFE, CGMA

03/04/2020

Sole Method of Proving Timely Mailing to the IRS
03/02/2020
By M. K. Ramadoss, CPA—San Antonio

The U.S. Supreme Court’s decision not to hear the appeal from the Ninth Circuit in Baldwin v. United States settles the law: certified or registered mail (or equivalent private delivery services) are the sole method of proving timely mailing of documents to the IRS.

Most CPAs routinely send documents to the IRS by certified mail or specified private delivery services. With this decision, the issue is finally clarified.

The issue involved whether a taxpayer could only show timely mailing of their document by producing a certified or registered mail receipt stamped by a U.S. Postal Service employee or whether they could resort to other evidence showing the document had been timely mailed. In 1992, the Ninth Circuit ruled in Anderson v. United States that other evidence could be considered. Other circuits had held that provisions Congress enacted in Section 7502 for proof of timely filing of documents were meant to be the sole method of proving such timely mailing.

This split in the circuits led the IRS in 2011 to revise regulations under Section 7502, taking the side of the circuits that held that the section was meant to be the sole method of proving timely mailing of the document, superseding the common law mailbox rule. The relevant provision now reads:

“(i) Registered and certified mail. In the case of a document (but not a payment) sent by registered or certified mail, proof that the document was properly registered or that a postmarked certified mail sender's receipt was properly issued and that the envelope was properly addressed to the agency, officer or office constitutes prima facie evidence that the document was delivered to the agency, officer or office. Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated PDS as provided for by paragraph (e)(2)(ii) of this section, are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.”

https://www.supremecourt.gov/opinions/19pdf/19-402_o75p.pdf

https://www.thetaxadviser.com/issues/2019/jul/regulations-common-law-mailbox-rule.html

https://www.irs.gov/filing/private-delivery-services-pds

04/05/2019

The Asset-Based Valuation Approach

Introduction

Valuation analysts (analysts) are retained to value closely held businesses, business ownership interest, and securities for a variety of transaction, financing, taxation, accounting, litigation, and planning purposes. For each engagement, analysts consider the three generally accepted business valuation approaches: the Income Approach, the Market Approach, and the Asset-based Approach. However, most analysts rarely apply the Asset-based Approach in the typical business valuation. This column is part of a series of discussions related to the application of the asset-based valuation approach.

The Asset-based Approach is a generally accepted business valuation approach. The Asset-based Approach is described in most comprehensive business valuation textbooks. Consideration of the Asset-based Approach is required by most authoritative business valuation professional standards. For example, the American Institute of Certified Public Accountants) (AICPA) Statement on Standards for Valuation Services (SSVS) and the Uniform Standards of Professional Appraisal Practice (USPAP) require consideration of the Asset-based Approach. Such professional standards require the consideration of—but not necessarily the application of—the Asset-based Approach. In practice, many analysts immediately reject Asset-based Approach valuation methods as being too difficult, too time consuming, too client disruptive, or simply (and without adequate explanation) not applicable to the subject closely held company.

Many analysts do not seriously consider applying the Asset-based Approach in the typical business valuation. These analysts are not sufficiently familiar with the generally accepted methods and procedures within this approach. Many analysts labor under misconceptions about when—and when not—to apply this approach. And, many analysts also hold misconceptions about interpreting the quantitative results of the asset-based valuation approach. This series of discussions will address many of the common misconceptions about this business valuation approach.

The application of this valuation approach requires a slightly different set of skills than does the application of the Income Approach or the Market Approach. Not all analysts have the experience or expertise to perform a comprehensive Asset-based Approach analysis. The completion of the Asset-based Approach often requires more analyst time than other business valuation approaches. That additional analyst time typically translates into additional professional fees to the client. Therefore, clients often discourage the use of the Asset-based Approach when they learn of both the additional time and the additional costs associated with this valuation analysis. This valuation approach often requires more data from—and more involvement by—the closely held company executives. When these additional commitments are understood, many clients discourage the use of the Asset-based Approach.

In many controversy-related assignments, the analyst may not be granted access to the company facilities or executives. Particularly in a retrospective controversy-related assignment, the data that the analyst needs—and the personnel that the analyst needs access to—are simply no longer available. In some instances, it may simply be impractical to perform some Asset-based Approach valuation methods.

Theory of the Asset-based Approach

The Asset-based Approach is sometimes called the Asset Approach to business valuation. Either term is generally accepted. The Asset-based Approach encompasses a set of methods that value the subject company or security by reference to its balance sheet. In contrast, Income Approach and Market Approach valuation methods focus on the company’s income statement and/or cash flow statement.

An important procedure in any business valuation is to define the business ownership interest subject to valuation. The assignment should specify whether the analysis intends to conclude a defined value for the subject company:

1. total assets,

2. total long-term interest-bearing debt and total owners’ equity,

3. total owners’ equity, or

4. one particular class of owners’ equity.

Each of these descriptions is a valid objective of a business valuation. And, each conclusion is often referred to as a “business value.” However, each of these business value conclusions will be quantitatively different for the same company. Each of these business value conclusions will be appropriate in the right circumstance—usually based on the actual or hypothetical transaction that is being analyzed.

The subject company’s total asset value is important in an acquisition structured as an asset purchase (instead of as a stock purchase). The company’s total invested value (TIC)—often called the market value of invested capital (or MVIC)—is the value of all interest-bearing debt plus all classes of owners’ equity. Estimating the value of the TIC is important in a deal structure where the buyer will acquire all the company’s equity and assume all of the company debt. Estimating the value of the total owners’ equity is important when only the company’s equity securities (say all common stock and all preferred stock) are transferred in the transaction. And, estimating the value of one particular class of equity only (say only the company’s common stock) is important when only that class of security is transferred in the transaction.

The Asset-based Approach is based on the principle that the value of the equity of a company is equal to:

the value of the company total assets

minus

the value of the company total liabilities

If properly applied, this valuation formula can be used to indicate the value of any of the valuation objectives listed above. However, there are two foundational words in the above formula: 1) value and 2) total.

The Asset-based Approach is based on the value of (and not the recorded balance of) the subject company’s assets and liabilities. The standard of value in the analysis has to be defined. The valuation date of the analysis has to be defined. The standard of value is determined by the assignment. Common standards of value for taxation and accounting purposes include fair market value and fair value. Other common standards of value include investment value, owner value, use value, user value, and others. Whatever the assignment-specific standard of value is, the value conclusion is likely going to be different from the recorded account balances presented on the company’s balance sheet. Those balance sheet recorded account balances are probably presented in compliance with generally accepted accounting principles (GAAP). Those account balances typically include a combination of historical cost-based measures and GAAP-based fair value measures.

The Asset-based Approach is also based on the total of all of the company’s assets and liabilities. GAAP-based balance sheets typically exclude major categories of assets and liabilities. GAAP-based balance sheets do not record most internally created intangible assets. In the information age, such intangible asset categories often represent the major sources of value for any business entity. This statement is obvious for technology-related companies. This statement is also true for most companies. Under U.S. GAAP, the values of internally created employee relationships, supplier relationships, customer relationships, and goodwill are not recorded on the balance sheet. The value of the entity’s contingent liabilities are not recorded under U.S. GAAP. Therefore, employee lawsuits, environmental claims, unresolved income tax audits, and other claims against the debtor company are typically not recorded on the balance sheet.

Unlike the GAAP-based balance sheet, the Asset-based Approach value-based balance sheet recognizes the current value of: 1) all of the company’s assets (both tangible and intangible) and 2) all of the company’s liabilities (both recorded and contingent).

To conclude the defined value for the company’s assets and liabilities (whether individually or collectively), the analyst applies generally accepted asset (and liability) valuation methods. These valuation methods are categorized into the three categories of generally accepted property valuation approaches: the Income Approach, the Market Approach, and the Cost Approach.

When to Apply the Asset-based Approach

Under most professional business valuation standards, the analyst should consider all generally accepted valuation approaches. Therefore, the relevant question is not: when should I perform the Asset-based Approach? Rather, the relevant question should be: when can I not perform the Asset-based Approach? As a general principle, the Asset-based Approach should at least be considered (if not completed) in every business valuation assignment. The reasons why an Asset-based Approach analysis is not performed should be described in the valuation report. And, the reasons should be substantive and not perfunctory. That is, a mention that “the subject company is an operating company” may not be a sufficient explanation.

The analyst’s selection of applicable valuation approaches is a function of four primary factors: 1) the type of subject company, 2) the type of subject business interest, 3) the type of subject transaction, and 4) the availability of necessary data.

Some analysts believe that the Asset-based Approach is only applicable to so-called asset-intensive companies. This conclusion is technically correct. However, this conclusion ignores the reality that virtually every company is an asset-intensive company. The fact is that the Asset-based Approach is applicable to tangible-asset-intensive companies—and to intangible-asset-intensive companies. Virtually all companies are either tangible-asset-intensive or intangible-asset-intensive (or a combination of both asset types). Therefore, the Asset-based Approach is applicable to most types of companies.

Some analysts also believe that the Asset-based Approach is only applicable to so-called asset holding companies. In fact, this approach is applicable to any company that owns assets. So, the Asset-based Approach may apply in the valuation of asset holding companies, and it may apply in the valuation of asset operating companies. Just about every company falls into one (or both) of these two categories. Therefore, for analysts who know how to perform asset valuations on a going-concern premise of value basis, the Asset-based Approach is applicable to most types of companies.

The type of valuation subject influences the selection of the valuation approach. The Asset-based Approach (without adjustment) typically concludes a controlling, marketable ownership interest level of value. This approach is particularly applicable to the valuation of an overall business enterprise—a valuation objective that often relates to a business purchase or sale transaction. This valuation approach is not as applicable to the valuation of a non-controlling, non-marketable block of nonvoting common stock—a valuation objective that often relates to a tax planning, compliance, or controversy assignment.

The type of the transaction (or the type of the assignment) influences the selection of the valuation approach. The valuation of an overall business is well served by the asset-based valuation approach. This approach is particularly applicable to a company merger and acquisition analysis, a stock exchange ratio analysis, a fairness opinion, a solvency opinion, or any other transaction involving the overall business enterprise.

This valuation approach is applicable to a company acquisition that is structured as an asset purchase transaction (as compared to a stock purchase transaction). This is because the deal price is directly related to the value of the company tangible and intangible assets. The Asset-based Approach is applicable to any transaction that is structured as a taxable transaction (as compared to a nontaxable transaction). This is because the deal price will depend on the prospective depreciation and amortization expense and income tax rates associated with the revalued tax basis of the transferred assets. This valuation approach is applicable for asset-based secured financing purposes. In such an instance, different creditors could have different claims on different debtor asset classes. And, this approach is applicable for various taxation-related assignments, such as a company conversion from C corporation tax status to S corporation tax status.

The quantity and quality of available data affects the selection of the valuation approach. The fact that there are no sufficiently comparable publicly traded companies in the subject industry sector affects the analyst’s ability to apply the market approach guideline publicly traded company method. The fact that there is no prospective financial information in existence at the subject company affects the analyst’s ability to apply the Income Approach discounted cash flow method. If the analyst has no access to company asset-specific information (e.g., no available information regarding the company’s individual tangible assets or intangible assets), this fact will affect the analyst’s ability to apply the Asset-based Approach asset accumulation (AA) method.

Likewise, if the analyst is working for the outside party in a transaction or a litigation proceeding, this fact may affect the analyst’s ability to obtain sufficient data (or sufficient asset access) to apply the AA accumulation method. And, if the valuation is retrospective—and all of the company’s tangible and intangible assets have materially changed since the valuation date—this fact may affect the analyst’s ability to apply the AA method.

The above-mentioned data limitations primarily relate to the AA method. Asset-specific data limitations, asset access limitations, and retrospective valuation dates are less important in the application of the adjusted net asset value (ANAV) method. Data issues may affect the analyst’s selection of which Asset-based Approach valuation method to apply. Data issues do not necessarily eliminate the application of the Asset-based Approach.

The most relevant reasons why analysts do not apply the asset-based valuation approach are: 1) there are additional costs and time requirements associated with this approach, and 2) many audiences for valuations (including boards of directors, shareholders, bankers, legal counsel, and judicial finders of fact) are not as familiar with asset-based valuation analyses.

Summary

This discussion provided an introduction to analyst considerations regarding the application of the Asset-based Approach to value both asset-holding companies and operating companies. The next discussion in this series will consider common misconceptions regarding the application of the asset-based business valuation approach. Future discussions in this series will describe and illustrate two common Asset-based Approach methods: 1) the AA method, and 2) the ANAV method.

Robert Reilly, CPA, ASA, ABV, CVA, CFF, CMA, CBA, is a managing director of Willamette Management Associates based in Chicago. His practice includes business valuation, forensic analysis, and financial opinion services. Throughout his notable career, Mr. Reilly has performed a diverse assortment of valuation and economic analyses for an array of varying purposes.

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