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Mike Bannerman, CPA, CA
Way more important than keeping up with the Joneses!
Do you know the value of your business? Knowing its value and keeping that knowledge up to date can be very important – especially when it comes time to do any sort of reorganization. A recent court case illustrates just how significant that knowledge can be.
In this recently settled case, the deduction that the company had reported from the value of goodwill was denied.
Goodwill is a term used for the portion of a business’s value that’s in excess of the fair market value of its tangible net assets (i.e., buildings, equipment, etc.). Goodwill is the premium your business has created by generating income exceeding the value of physical assets. The value of goodwill can be arrived at by figuring out what the business is worth as a whole and then subtracting the tangible assets to arrive at the portion that someone would pay for the business.
Someone had some ’splaining to do . . .
The accounting firm that did the valuation didn’t testify as to what the value was in the year following their report. While the case doesn’t say specifically why they didn’t testify, a likely reason would be that a valuation report is done at a particular point in time and commenting on the value a year and a half later wouldn’t be within the scope of the valuation engagement and could open the accounting firm to risks itself.
It’s my opinion that, provided there was still a value for goodwill, if Atlantic Thermal had done even a basic estimate of value at the date of transfer that showed this, it probably would’ve been sufficient to the court to overturn the CRA’s nil value that was based on limited information.
While there are many factors specific to the case, what we’ve seen shows that when dealing with the value of a company for reorganizations purposes, relying on information that isn’t current can carry risks and make your company’s value harder than expected to prove if it’s questioned by the CRA – or anyone else that is relying on the information!