ASA Files Amicus Brief in Vinoskey Case, Provide Clarity on When DCF or CCF Are Appropriate

 
RESTON, Va. - Oct. 15, 2020 - PRLog -- On October 2nd, ASA filed an amicus brief in the case Scalia v. Vinoseky, on appeal to the US Fourth Circuit Court of Appeals, in an effort to address valuation issues raised in the litigation. Specifically, ASA focused its brief in part on the use of the Discounted Cash Flow (DCF) method versus the Capitalized Cash Flow (CCF) method, and when the use of each method is appropriate.

The trial court, in its decision, found that DCF was "a more commonly used and reliable method for evaluating the fair market value of closely-held stock", a conclusion ASA felt mischaracterized how the DCF and CCF methods are viewed. ASA explained in its brief that both DCF and CCF are equally valid ways to calculate value, and that the key factor to consider when deciding between both methods is the volatility of a business' cash flows in the discreet forecast period.

Where cash flows vary widely, DCF is appropriate; where cash flows are reasonably steady, CCF is appropriate. The court also felt DCF was more widely used than CCF, and ASA's brief emphasized that appraisers will choose methods based on the facts and circumstances of the business, and to use a blanket statement regarding use could discourage appraisers from using CCF where it is the more appropriate method.

ASA went on in its brief to address a second mischaracterization – that DCF inherently produces a control value. ASA stated that the assumptions and inputs into the calculation of DCF will influence whether a control or minority interest value is established, not the method itself. Additionally, ASA goes on to emphasize that the presence or absence of control only matters where alternative business management decisions could lead to better results, and may not always be critical to the opinion of value being developed.

Finally, ASA used valuation principles regarding the forgiveness of debt and its impact on damages calculations. ASA points out that in a valuation context the forgiveness of debt would increase company value, and if the forgiveness of debt is able to positively affect value, then it should be considered as an offset against how damages are calculated. To not offset debt forgiveness in a damages calculation ignores sound valuation and economic damages principles.

To read ASA's brief, click here: https://www.appraisers.org/asa-newsroom/article/2020/10/15/asa-files-amicus-brief-in-vinoskey-case-provide-clarity-on-when-dcf-or-ccf-are-appropriate

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Todd Paradis
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