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How Will Fair Value Valuations For Financial Reporting Be Affected By The TCJA

Posted in Business Valuation, on Jan 2019, By: Matthew Crane

 

The upcoming audit season will bring some new challenges for auditors testing of fair value measurements for financial reporting. Some recent changes due to the Tax Cut and Jobs Act of 2018 (“TCJA”) will create valuation issues:

  1. The reduction in corporate tax rates affected the value both publicly traded investments and privately held investments;
  2. Deductibility of interest expense is now limited;
  3. Bonus depreciation will further reduce taxes for both new and used equipment purchases;
  4. Carryback of Net Operating Losses is no longer allowed and limited to 80% of taxable income;
  5. The TCJA moves U.S. taxation to a territorial system.
  6. The tax benefits of electing S-Corp. status should be revisited, if used.

If relevant to an investment held or to a company acquired, the above will require valuation models to be updated, particularly when valuation is based upon a discounted cash-flow method.

Companies that do business with the People’s Republic of China are and will be greatly affected by the Tariffs instituted recently.  It is uncertain how much and how long is to be factored into valuation, but pricing should consider such events.

Some other changes in accounting standards also may affect valuations. Starting in 2019 under ASU 2016-02 the accounting for leases will change. The new standard will require that Companies record a liability for operating leases, if the criteria of an “embedded lease” is met. Previously, such a valuation was unnecessary.  For acquisition accounting, such leases will require a valuation, when previously no liability was recorded.

The changes to tax legislation and accounting guidance affect the future cash flow and/or liabilities recorded on the balance sheet of companies, which can translate to a change in capital structure and the discount rate used.  Some theorize such changes creates volatility and the public markets have experience a good deal of variation this past year.

For additional information on this or any other issues related to business valuation, forensic accounting or litigation support please feel free to contact our office at the above phone numbers. You can also email our office at msgcpa@msgcpa.com for immediate assistance.

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