9MARCH 2022CFO TECH OUTLOOKnature. One challenge is determining the appropriate valuation method to employ. This selection requires both a technical understanding of valuation theory as well as the experience to know what is acceptable in the framework of fair value as outlined in ASC 820. For instance, utilizing comparable transactions is often an acceptable methodology, but how does one define "recent"? This assumption is subject to interpretation, and what becomes most important is documenting the reasoning for the selection and having the selection be based on valuation best practices. In many instances there may not be a recent transaction to compare to, which means additional assumptions and professional judgement must be utilized. I have found that one efficient way to utilize professional judgment is to analyze comparable transactions of public companies in the same industry. For example, if you are valuing a position based on a multiple of EBITDA, you would want to know what other public companies in the same industry are trading at when selecting an appropriate multiple. A subscription to a data service is often required to gain access to reliable market data. In addition, the selection of a valuation multiple also requires professional judgement and expertise. In following best practices, the logic and reasoning utilized to select a multiple must be documented and supported. Simply selecting an average EBITDA multiple from a handful Auditors will want to review supporting financial statements, and reports and understand what level of research and analysis was performed in determining the fair value of the asset or liabilityof publicly traded comparable companies may not be appropriate if the subject company is not comparable to the average in terms of financial and operational performance. Once you have navigated the pitfalls of picking the valuation method and determining the fair value of the subject asset or liability,it becomes necessary to document your work. Third-party valuation firms will conveniently provide a detailed report that discusses relevant risks, market conditions, and probabilities involved in the determination of fair value along with a write up on the specific characteristics of the underlying asset or liability. While it is difficult to match this level of documentation without spending more time than you may have available on it, you will need to consider and document all of these factors in your analysis if you plan to perform this work yourself. Auditors will want to review supporting financial statements, and reports and understand what level of research and analysis was performed in determining the fair value of the asset or liability. For many financial executives, performing this work without the assistance of professional expertsis technically possible, but is not feasible given the constraints on time and requisite expertise regarding the fair value framework discussed in ASC 820. There are many factors to consider when determining how you want to value securities under ASC 820, and often using a third-party valuation firm to perform this service is the most cost effective and efficient option due to their understanding of the fair value framework and hierarchy outlined in ASC 820 paired with the expertise and experience of utilizing valuation best practices thereby enabling a simple and efficient audit review process. Michael McCoy
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