Shades of Future Past …

December 9th, 2009 | Income Approach & Methods | Regulatory Matters | Valuing Goodwill

…or more accurately, Through the Past Darkly. Other cliches that come to mind: History Repeats Itself and PT Barnum was Right.

Despite a well-established regulatory construct that dates back to the IRS CPE Texts in the early 1990s, using the Cost Approach to value practices for acquisition by hospitals is back in fashion again, primarily by healthcare-appraiser wannabes. Less there be any misunderstanding, unless there is value under the Income Approach as determined from a well-reasoned DCF, use of the Cost Approach to value Intangibles is not appropriate, period. That's a PERIOD. What could be clearer than the Derby case?

Here are prior posts that summarize the Rules

http://cpanet.typepad.com/cpanet/2009/06/ahla-tax-finance-practice-group-member-briefing.html
http://cpanet.typepad.com/cpanet/2009/03/exempt-organization-cpe-text.html
http://cpanet.typepad.com/cpanet/2008/10/derby-et-al-v-commissioner.html
http://cpanet.typepad.com/cpanet/2007/10/post-transactio.html
http://cpanet.typepad.com/cpanet/2006/11/umdnj.html (!)

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One Response

  • Chad Peterson says:

    I understand the argument that the income approach needs to include the physician compensation that is contemplated post-transaction. That makes perfect sense to me.
    “Less there be any misunderstanding, unless there is value under the Income Approach as determined from a well-reasoned DCF, use of the Cost Approach is not appropriate, period.”
    Hypothetically, let’s say a physician practice has $2M in equipment, tables and chairs, but the income approach only shows $500,000 of value. It would then be acceptable to value for $2M, in your opinion?
    You’re problem would be if the income approach showed a -$500,000 in value, correct? Would the value then be $1.5M for this practice?
    Just trying to make sure I understand the argument.



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