BARCOMA, Diana Mae C.

ACCE 412 (11435) | 3:30 PM -5:00 PM

REACTION PAPER: JOURNAL READINGS

For the longest time, valuation has become part of every business processes
in every business sectors. It only contains a simple definitions –it is an act of
determining the potential value of a certain business. However, as I read the work
“The Application of Business Valuation Services in Financial Reporting, Tax
Compliance, And Litigation: Certified Public Accountant” by Frank Kiepura, it opened
my eyes and I learned on why it exists and how it does apply to certain fields in
business. Specifically, the document discussed its applications in the field of financial
reporting, tax compliance and litigation.
First, business valuation mainly applies to financial reporting in terms of
determining the fair value, which is the sale price of an asset or fee to be paid to
transfer a liability between market participants. Kiepura stated that GAAP and FASB
requires certain types of assets and liabilities that needs to be properly valued. I
agree with all of these. In fact, a lot of account titles needs to be initially or be
subsequently valued using fair value method. Example of these are investments or
financial assets, biological assets, and also in terms of revaluing property, plant and
equipment.
In addition, I also liked how Kiepura stressed out how valuation is crucial in
financial reporting in terms of mergers and acquisitions. Business valuation plays a
major role in getting the value of either the goodwill or the gain on bargain purchase.
This is because in order to determine it, the purchase price is allocated first to all the
net assets of the acquired business using their fair values. Aside from that, in order
for the consolidated financial statements to be faithfully represented, contingent
consideration, intangible assets and equity-based payments needs to be properly
valued, by which is only done by specific methods of valuation and the significant
judgements from valuation experts.
Second, as for the tax compliance, valuation plays an important role in terms
of paying for estate tax and donor’s tax. These taxes are levied depending on the
value of the taxable estate or gift, and thus, proper valuation methods is highly
crucial to determine the correct amount of tax to be paid. Furthermore, aside from
estate and donor’s tax, valuation is also crucial in determining the income tax of a
company who has nonqualified deferred compensation (NQDC) plans. Example of
these plans includes stock options, stock appreciation rights and other equity-based
compensation. Depending on the compliance of the company to certain conditions,
NQDC plans may be recognized as part of the company’s gross income in
computing the income tax. I liked how Kiepura detailed all of these information
regarding valuation and tax compliance in his work. However, I also find some of its
information to be not applicable in the Philippine setting.
Lastly, business valuation affects litigation, wherein the main tasks of the
valuation advisers, whom must be independent to the parties, are to determine the
decline in value of the aggrieved party’s business or to determine the loss in profits.
One of the prominent example of these litigations are shareholder disputes. These
usually arise from the actions coming from dissenting shareholders and in minority
oppression actions. Proper valuation methods is crucial for these types of disputes
BARCOMA, Diana Mae C.
ACCE 412 (11435) | 3:30 PM -5:00 PM

since the usual remedies for these cases is to purchase the shares of the dissenting
shareholder or the oppressed shareholder at fair value. After reading these
information regarding valuation and litigation, I then realized how expensive these
litigations can get. Aside from the legal expenses, you also need to pay a certain
sum of money to valuation experts in order to determine the value of the business or
the losses in profits.