Abstract
In 2002, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) entered into The Norwalk Agreement. This agreement was a Memorandum of Understanding in which the two boards “…pledged to use their best efforts to (a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained” (FASB, 2002). Over time, it is expected that U.S. public companies will eventually prepare their financial statements according to International Financial Reporting Standards (IFRS). Professionals who appraise small private companies often use data derived from public markets to arrive at their values. Since it is not likely that small private companies will adopt IFRS at the same rate, or to the same extent, as publicly traded companies, discount rates derived from public market data will not be applicable in the valuation of small private companies without specific adjustments to ensure comparability. In this project, a hypothetical company is used to illustrate the difference in discount rates when the financial statements are prepared according to U.S. Generally Accepted Accounting Principles (GAAP) versus when they are prepared according to IFRS. The discount rate is selected using the buildup method from data published in the Ibbotson SBBI 2010 Valuation Year Book and applied to the subject company to arrive at an indicated value. The next step is to convert the GAAP basis financial statements to IFRS. The value of the subject company and the IFRS financial statements will then be used to determine and compare the corresponding discount rates. Finally, the adjusted discount rates will be used to illustrate the importance of matching the benefit streams of small private U.S. companies that continue to use GAAP to the benefit streams of publicly traded companies once they have adopted IFRS.