The American Institute of Certified Public Accountants (AICPA) Publishes Critical Guidance for Litigation and Business Valuation Specialists – January 31, 2003

The AICPA announces two new publications for CPAs who provide business valuation and litigation services:

· Valuation Toolkit for Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141 and SFAS No. 142. The toolkit contains practical reference materials to perform fair value measurement engagements in connection with business combinations and acquired goodwill and other intangible assets. Also, to aid in complying with FASB’s new Statements of Financial Accounting Standards, the Toolkit includes training information, a bibliography of important reference sources, engagement letter considerations, checklists and more. The Toolkit is available at:

· Special Report 03-01, Litigation Services and Applicable Professional Standards (AICPA Product Code No. 055297), provides guidance in the applicable standards, rules and laws, and includes sections addressing conflicts of interest, work paper form and content and reporting. The report can be ordered on-line at, by phone at 1-888-777-7077 or by fax 1-800-360-5066.

Valuation practitioners should also refer to the Auditor’s Toolkit for Auditing Fair Value Measurements and Disclosures which can be downloaded at:


U. S. copyright extended by 20 years

Supreme court delays when creative work turns public

In January 2003, the U. S. Supreme Court upheld a law extending copyright protection by 20 years, delaying when creative works such as Walt Disney Co.’s Mickey Mouse, F. Scott Fitzgerald’s novels and George Gershwin’s compositions become public property.

The 7-2 ruling was a win for the U. S. Justice Department, large media firms and song publishers that argued the longer term was needed to protect an industry that contributes more than U.S. $500 billion to the U. S. economy. This ruling affirmed a lower-court decision by the U. S. Court of Appeals for the District of Columbia, which ruled 2-1 against the challengers in 2001.

It dealt a defeat to an Internet publisher and others who challenged the 1998 law for limiting free speech and harming the creative process by locking up material they said should be in the public domain for all to use without charge. The challenge was brought in 1999 by Eric Eldred, a New Hampshire web hobbyist who is building a free Internet library, and Dover Publications Inc., which produces commercial editions of public-domain works.

Jack Valenti, CEO and President of the Motion Picture Association of America, representing Hollywood’s biggest studios, said he was pleased the court affirmed “the absolute authority of Congress to set copyright terms.”

“This ruling is a victory not solely for rights holders, but also for consumers everywhere,” he said, adding the aim of the copyright was to provide incentive to create and preserve creative works.

Justice Ruth Bader Ginsburg said for the majority that Congress in adopting the law acted within its powers under the Constitution, but she emphasized the court was not passing judgment on whether the extension was wise policy. She also said the law does not violate free-speech rights.

“It protects authors’ original expression from unrestricted exploitation,” Ms. Ginsburg said, adding that it permitted the reproduction, distribution and performance of certain copyrighted work under specified circumstances.

At issue was the 1998 Sonny Bono Copyright Term Extension Act, which extended the exclusive period that artists and corporations can control their creative works by 20 years. As a result, thousands of well-known works, including the earliest Disney cartoon films with Mickey Mouse and Fitzgerald’s novels were prevented from passing into the public domain. Billions of dollars of entertainment-industry royalties were at stake.

Opponents said the law violated the copyright clause of the Constitution, which gives authors and inventors exclusive right to their works for an unspecified “limited” period to “promote the progress of science and useful arts.”
The first federal copyright law, in 1790, established a copyright term of 14 years, with an optional 14-year extension. By the time Congress overhauled copyright laws in 1976, that term had stretched to the life of the author plus 50 years, or 75 years for works owned by corporations.

The 1998 law extended the term for another 20 years. Congress adopted the legislation, named after the late congressman and singer from California, to bring U. S. laws into conformity with the European Union.

In 1993, as part of its larger drive to bring Europe’s panoply of trade rules closer together, the EU head office set a uniform copyright protection regime for its member nations. All works would be protected for 70 years after the death of the author, mandating European countries, most of which still had a 50-year rule on the books, to enact stricter copyright protection. The new EU decree essentially adopted the German law, which at the time was one of the most rigorous copyright laws in the world.

Yet, despite this convergence, the U. S. and the EU continue to have entirely different approaches in protecting copyrights owned by corporations, such as Disney’s Mickey Mouse cartoon.

U. S. law, with the 1998 congressional revision, sets the shelf life of corporate copyrights at 95 years. The EU, however, has no separate rules for copyrights held by companies and instead applies the same rules used for individual authors.

So far as Europe is concerned, when an author creates a work while in the employ of a company, the copyright will last for 70 years after the death of the author, not for 95 years since the creation (of the work), as would be the case in the U. S. Legal experts say it is hard to compare which regime is more favorable because much depends on how long the author lives after he / she creates something for a company.

The U. S. decision means Canadian law remains out of step with both U. S. and European legislation. “It may be difficult for Canadian lawmakers to resist the pressure to extend their terms,” said Casey Chisick, a copyright specialist with the Toronto-based law firm, Cassels Brock.

In Canada, copyright typically lasts as long as an artist’s life, the remainder of the year in which the author dies, plus 50 years thereafter (company held copyright lasts 75 years), some 20 years less than in the United States. This is so whether or not copyright may still subsist in that same work in another country. Consequently, U. S. content can be used free in Canada much earlier than in the United States.

[Financial Post and Report on Business, January 16, 2003].

Taxman grabs non-competition payments

Timing of amendment startles deal-makers

Corporate deal-makers were caught off guard on October 7, 2003 when the Federal Department of Finance announced proposed amendments to the Income Tax Act.

Payments a vendor receives in the course of a corporate share sale for agreeing not to compete with the purchaser will now be taxed, unless the payments are a consequence of an agreement written on or before October 7.

The amendments overturn a March 2003 decision by the Federal Court of Appeal (“FCA”). In the case of Manrell v. Canada, the FCA ruled that payments made to ensure a seller won’t set up business again and compete against a purchaser are not taxable. It is common business practice for a purchaser to seek such a clause in the purchase-and-sale agreement.

On October 7, however, those who were in the middle of a deal and taking into account the impact of the Manrell decision while negotiating the value of a non-competition clause found themselves abandoning that part of their negotiations. Robin MacKnight, a partner with Wilson Vukelich in Markham, Ontario, says his firm was in the middle of a deal when the press release came out. “We had to say: ‘OK, so much for that part of the deal,’” he said.

No one in the tax community had expected Manrell to stand for long because of the adverse effect on tax revenue. But, instead of mounting an appeal of the FCA decision to the Supreme Court of Canada, the Finance Department simply decided to overturn the FCA’s position by issuing the press release.

Historically, the Canada Customs and Revenue Agency (“CCRA”) has used parts of the Income Tax Act to justify treating the non-competition clause as capital property; therefore, the seller was taxed on payments as a capital gain. The October 7 press release confirms this stance. The non-competition agreement must increase the market value of the shares in order to avoid being fully taxed as corporate income and in order for it to be taxed in the hands of the seller.

The basis of this tax treatment is that the shares would be worth less if a seller with a solid business reputation set up a competing business the day after the sale, says Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto: “The agreement adds to the value of the company. The seller should be paid for that.” Consequently, he said, Finance considers it the seller’s capital gain.

Despite this legislation by fiat, MacKnight said Finance’s position on the issue is reasonable. “It’s a bright-line test and not unreasonable,” he said. It makes more sense to structure these deals so they result in capital gains tax for the seller rather than in corporate income tax. The difference in tax rates on the two streams of income on a combined federal/provincial basis is about 15 percentage points (with capital gains tax at about 33% and corporate income tax at about 48%).

The problem, said MacKnight, is that Finance has a history of coming out with such announcements and then slowly translating them into legislation that gets passed. He pointed out to the October 1, 1996, press release on non-resident trusts. After seven tax years, only now is Finance saying that it will try to get that legislative package through the House of Commons.

The debate over the tax treatment of non-competition agreements began in 1997, when in Fortino v. Canada the FCA ruled against myriad CCRA arguments that certain sections of the Income Tax Act should enable the CCRA to tax non-competition payments.

Subsequent to the Fortino decision, Tod Manrell, a shareholder in three companies who sold his shares for more than $14 million, decided to appeal his 1995 tax assessment. When Manrell sold his shares, he agreed to a non-competition agreement and the payments for it were included as part of the sale price. Manrell filed his tax return, treating the payments he received as payments made on account of capital, and paid the corresponding taxes. That was consistent with CCRA policy as it existed before the Fortino case.

After hearing about that case, Manrell appealed his tax bill, arguing that non-competition payments should not be subject to taxes. He lost in the Tax Court of Canada, which ruled the non-competition payments were capital property and should be taxed. But the FCA disagreed and ruled that Manrell had not sold any “property” and therefore, there was no capital gain that should be taxed.

The FCA decision changed the corporate deal-making landscape – but only for a short time. Sellers would go into a deal wishing to structure it in a tax-favorable manner, but that would require the purchaser’s agreement, and the FCA’s decision was not favorable for purchasers. It did not boost the adjusted cost base of the purchaser’s shares or give rise to a deduction for the purchaser. With the seller getting the tax benefit, the purchase price would have to be negotiated accordingly.

That kind of deal-making increased chances the CCRA would challenge the valuation of a non-competition agreement as part of a deal. The benefit of the proposed amendments is that the tax treatment of non-competition agreements is clear and thus CCRA challenges will be less probable.

[Investment Executive, Mid-October 2003].

Regulatory Developments

Valuations Prepared in Connection with New Accounting Standards May Be Discloseable

Recent accounting standards developed by the Accounting Standards Board (“AcSB”) in Canada (See AcSB Handbook Section 3062, Goodwill and Other Intangible Assets) and its U. S. counterpart, the Financial Accounting Standards Board, have come into effect that require goodwill and intangible assets with an indefinite life to be tested for impairment on an annual basis. Goodwill and indefinite life intangibles are no longer amortized. Intangible assets with a definite life continue to be amortized over their useful life.

The procedures for making transitions to, and for complying with, the new accounting standards may require issuers prepare valuations from time to time. It should be noted that any such valuations may be discloseable under Canadian securities laws.

Specifically, Ontario Securities Commission (“OSC”) Rule 61-501 and Quebec Securities Commission (“QSC”) Policy Q-27 require disclosure of any prior valuation in the event of subsequent insider bids, substantial issuer bids, going-private transactions or related-party transactions (if minority approval is required). “Prior valuation” is defined for the purposes of OSC Rule 61-501 (refer to Part 1.1 Definitions) and QSC Policy Q-27 to mean “a valuation or appraisal of an issuer or its securities or material assets, whether or not prepared by an independent valuator, that, if disclosed, would reasonably be expected to affect the decision of a beneficial owner to vote for or against a transaction …” (emphasis added).

In addition, the normal course issuer bid rules of The Toronto Stock Exchange (the “TSX”) require an issuer to include in its notice filed with the TSX a summary of any appraisal or valuation of the issuer, its material assets or securities prepared within the preceding two (2) years. For the purposes of the TSX rules, an “appraisal or valuation” includes both an independent appraisal or valuation and material non-independent appraisal or valuation.

It is important to note that, for purposes of OSC Rule 61-501, QSC Policy q-27 and the normal course issuer bid rules of the TSX, a single asset of an issuer could, depending on the circumstances, be considered to constitute “material assets”.

[The Valuation Law Review: volume 8 / issue 1, July 2002].

Independence / Conflict Issues

The SEC’s Final Rules for Valuations Performed for Public Audit Clients

These rules were issued at the end of January 2003, and the biggest surprise was that there were no surprises. The final rules are nearly identical to the rules issued by the SEC back in November 2000, except for the elimination of the safe-harbour related to actuarial benefit valuations (an area that business valuation experts rarely get involved with anyway). The ability of an audit firm to do tax-purpose valuations for its own public-company audit clients was generally preserved, albeit with a higher bar since these services will now require Board Audit Committee approval.

It is therefore not expected that these rules will have a material impact on the market distribution of valuation providers between audit firms and non-audit firms. The market of providers has already adjusted to nearly all of the changes as a result of the issuance of the nearly-identical SEC rules back in late-2000. In fact, some of the Big-4 firms that had exited the valuation market after issuance of the November 2000 rules are now slowly getting back in to the field of valuations.

One item to keep in mind is that the AICPA (which issues rules governing the scope of services provided to private-company audit clients) has vowed to harmonize its scope of service rules for non-audit services with those of the SEC as soon as possible (more likely than not by December 2003). As a result, practitioners working for accounting firms should assume that they will not have greater scope-of-service latitude when doing work for private-company audit clients for much longer. Indeed, it may be prudent to voluntarily apply the same rules when doing valuations for private-company audit clients as are currently required for public-company audit clients.

[ASA BV E-Letter: issue 7-8; February 19, 2003].