Estimating Future Benefits

Questions and Answers

What organization replaced the AICPA's former authoritative body in 1973?

American Institute of Certified Public Accountants (AICPA)

Accounting Principles Board (APB)

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB) (correct)

Which Statement of Financial Accounting Standards was issued by FASB in June 2001 pertaining to business combinations?

SFAS No. 142

SFAS No. 141 (correct)

SFAS No. 157

SFAS No. 116

What is the effective date for the Accounting Standards Codification (ASC) for interim and annual periods?

September 15, 2009 (correct)

November 15, 2007

January 1, 2008

June 30, 2008

Which of the following opinions was previously issued by the Accounting Principles Board (APB) regarding intangible assets?

APB Opinion No. 17 Signup and view all the answers

What is considered the source of authoritative generally accepted accounting principles (GAAP) for nongovernmental entities?

Financial Accounting Standards Board (FASB) Signup and view all the answers

What is the purpose of using historical versus projected economic income in estimating future benefits?

To assess the likelihood of future cash flow Signup and view all the answers

Which method is commonly used to calculate the estimated future benefits?

Discounted cash flow analysis Signup and view all the answers

What is the primary factor to consider when validating calculations of estimated future benefits?

The accuracy of input assumptions Signup and view all the answers

The Capital Asset Pricing Model (CAPM) is primarily used to determine what?

The expected return on an investment Signup and view all the answers

What is the Weighted Average Cost of Capital (WACC) used for?

To determine the average cost of capital from all sources Signup and view all the answers

Which of the following is NOT a common method for determining capitalization/discount rates?

Profit and Loss Ratio Signup and view all the answers

What does the term 'risk premium' refer to in financial analysis?

The minimum return required by investors for taking more risk Signup and view all the answers

Which section of the capital/discount rates chapter discusses the less frequently used small business build-up models?

Section VIII Signup and view all the answers

What is the range of capitalization rates for tangible assets as per Revenue Ruling 68-609?

8% to 10% Signup and view all the answers

Which Revenue Ruling specifically recognized criteria for determining discounts for lack of marketability?

Revenue Ruling 77–287 Signup and view all the answers

What statement did Revenue Ruling 81–253 make regarding minority interest discounts?

No minority interest discount is available when family members hold a controlling interest. Signup and view all the answers

Which Revenue Ruling provided guidelines for valuing preferred stock?

Revenue Ruling 83–120 Signup and view all the answers

What is the range of capitalization rates for intangible assets as discussed in Revenue Ruling 68-609?

15% to 20% Signup and view all the answers

Which Revenue Ruling stated that it superseded Revenue Ruling 81–253?

Revenue Ruling 93–12 Signup and view all the answers

In which year was Revenue Ruling 81–253 issued?

1981 Signup and view all the answers

What key focus did Revenue Ruling 68-609 emphasize regarding business valuation?

Using adjusted net assets in business valuation. Signup and view all the answers

What is one of the main purposes of valuing a business?

To assess tax implications Signup and view all the answers

Which of the following is NOT a typical reason for valuing a business?

Setting executive bonuses Signup and view all the answers

What methodology is likely affected by the purpose of a business valuation?

Assumptions and methodologies of value determination Signup and view all the answers

Which scenario would require a business valuation specifically for regulatory purposes?

A charitable contribution made by the business Signup and view all the answers

In what situation would a valuation be important for 'buy/sell agreements'?

To determine partnership equity stakes Signup and view all the answers

Which of the following best describes the term 'exchange value' in business valuation?

The agreed value between merging companies Signup and view all the answers

When might a business valuation be necessary for 'expert testimony/litigation support'?

In a divorce case involving business assets Signup and view all the answers

Which of the following is a factor that may influence the methods used in valuing a business?

The specific purpose of the valuation Signup and view all the answers

What year was the IBA established?

1978 Signup and view all the answers

What is the primary goal of IBA's mission?

To assist members in their journey to professional excellence Signup and view all the answers

Which designation is achieved by meeting established criteria in IBA's accreditation program?

Certified Business Appraiser (CBA) Signup and view all the answers

What is included in IBA's Market Database?

33,000 comparables Signup and view all the answers

What is one of the established goals of IBA?

To increase awareness of business appraisal as a specialized profession Signup and view all the answers

How does IBA support its members?

Through resources like market data and technical support Signup and view all the answers

What distinguishes the CBA designation?

It showcases a high level of competence and prestige Signup and view all the answers

What role do volunteers play in IBA?

They provide mentoring, report reviews, and instruction Signup and view all the answers

Study Notes

Defining and Measuring Future Benefit Streams

Importance of estimations for planning and financial forecasting.
Historical vs. projected economic income helps gauge potential future benefits.

Capitalization and Discount Rates

Capitalization/discount rates are critical in valuing businesses.
Proper rates ensure accurate valuation reflecting risks associated with future earnings.

Revenue Ruling Highlights

Revenue Ruling 68-609 mandates evaluating adjusted net assets for business value.
Guidelines for capitalization rates:
- Tangible Assets: 8% to 10%
- Intangible Assets: 15% to 20%
Revenue Ruling 77–287 provides criteria for discounts for lack of marketability.

FASB Involvement in Valuation

FASB (Financial Accounting Standards Board) recognized as authoritative since 1973.
SFAS No. 141 addresses business combinations; SFAS No. 142 focuses on goodwill and intangible assets.
FASB's Accounting Standards Codification (ASC) authoritative for GAAP applications.

IBA and Business Appraisal Education

IBA (International Business Appraisers) established in 1978, focuses on appraiser education and market data.
IBA provides a supportive framework for members, promoting professional excellence.
IBA Market Database includes over 33,000 comparables accessible to members.

Goals of IBA

Raise awareness of business appraisal as a specialized profession.
Ensure access to qualified and ethical appraisers.
Expand knowledge of business appraisal theory and practice.
Provide information, programs, and services to members.
Influence national policies affecting the appraisal community.

Professional Accreditation in Appraisal

Certified Business Appraiser (CBA) designation recognizes accomplished business appraisers.
CBA enhances credibility among peers and in legal contexts.

Purposes for Valuing a Business

Valuation serves various purposes: tax, litigation, transactions, and regulatory compliance.
Common reasons for valuation include:
- Mergers and acquisitions.
- Fairness opinions and shareholder transactions.
- Estate planning, taxation, and bankruptcy assessments.
- Supporting loan applications and eminent domain proceedings.

Valuation in Mergers and Acquisitions

Valuation essential to determine exchange values during mergers.
Helps in establishing sale prices during divestitures or business sales.

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Description

This quiz focuses on defining and measuring future benefit streams using various methodologies. It covers the comparison of historical versus projected economic income and the validation of calculations for estimating future benefits. Test your knowledge on these important financial concepts.