Editors Note: With the coming of ME215: Performing Machinery and Equipment Valuations for Financial Reporting Purposes, to be held March 20, 2014 in Chicago, IL, we took this opportunity to interview course instructor Douglas R. Krieser, ASA on the benefits of joining ASA and the importance of a course like Performing Machinery and Equipment Valuations for Financial Reporting Purposes.
A twist of fate and a little luck got Douglas R. Krieser, ASA FRICS to where he is today. Doug has been an Accredited Senior Appraiser for 17 years and an active member of the Chicago Chapter of ASA as well as the Machinery & Technical Specialties Discipline. Read more about how his “in the bag” career as an Industrial Engineer took a left turn and led him to what he calls a “Much more interesting job than any engineer.”
Tell me how you first got involved in the appraisal profession?
I actually got into the appraisal profession “by accident”. I graduated from Marquette University in Milwaukee, WI in 1988 with a degree in Industrial Engineering. While there, I was working as an intern at General Motors and fully intended to be a production engineer at a GM assembly plant. GM had a hiring freeze the year I graduated and only one out of six interns was hired that year. We were not informed of this hiring freeze until our last term. Needless to say, I started immediately researching any and all open positions where I thought my degree could be of use. During my research, I found a company called Factory Mutual Engineering (FM) and saw a brochure on machinery appraisals. The brochure mentioned traveling the world, reviewing manufacturing processes, and dealing with both engineers and corporate finance personnel. I had never even heard of appraisal previously, but thought this would be a GREAT way to find an engineering job.
I was able to take advantage of FM’s very thorough training program. There was an intense “crash course” in valuation and machinery identification and for several months I was sent out with Senior Appraisers to assist on actual appraisals. I mostly observed and took notes. Throughout the inventory and appraisal process, the Appraisers would explain why they were doing why it was important. This helped me learn the appraisal process. After my initial 6 months of training, I was finally let loose to do my first solo appraisal.
I have dealt with many engineers in my time at FM and quickly realized I had a MUCH more interesting job (to me anyways) than any of the engineers I had met. I get bored easily and thus, being able to go into many different types of facilities and seeing how different products are made is very interesting. I have seen some pretty cool stuff such as the prototype space suits for the moon and mars, aircraft and helicopter manufacturing, automobile manufacturing, prototype vehicles and products, etc. I have also had the pleasure of being able to travel quite a bit, which I don’t think I would have done had I been an automotive engineer. I firmly believe my industrial engineering training has assisted me in my appraisal career since I can identify and/or uncover efficiencies and inefficiencies in processes, which may affect value. Overall, I am happy with my decision. It is a very interesting career, which allows me to travel and see many different companies and occupancies.
How did you first get involved with ASA?
I began hearing about the ASA from my former department manager Dick Amoling, FASA and others at FM. Dick eventually became President of ASA. I really became involved in the ASA after I left FM and began work at Arthur Andersen LLP.
I was heading up the Midwest machinery valuation practice for Andersen and my lead Partner suggested I get my ASA designation. I had been appraising for about 10 years at the time. I received my designation within a couple of years and wanted to get more involved. After Andersen was put out of business, I went to work for another consulting firm who wanted me to maintain my designation but was not especially supportive of me getting too involved due to the time commitment required.
After starting Valcon Partners Ltd, I was able to devote the time I felt ASA and the MTS discipline deserved. I quickly became involved in both teaching and the MTSC. As a matter of fact, on my last day with my former company, I left the office and headed to the airport to attend my first MTSC meeting in New Orleans.
Do you have a specialization? If so, how did you get specialized in this area?
Valcon Partners Ltd focuses on a wide variety of tangible asset consulting but was formed primarily to provide valuation in conjunction with mergers and acquisitions and other financial reporting related consulting. I was introduced to financial reporting valuations at Andersen and became very interested in this subject matter.
After Andersen, I worked at company where the primary focus was providing financial reporting valuations for clients of audit firms. Audit firms could not provide this service to their clients due to a conflict of interest.
I began to study the new standards in much detail.
Eventually, I was asked by the MTS Committee and a few companies to provide presentations of the new standards and how they apply to the tangible asset appraiser. I sort of became the “go to” appraiser on the committee for anyone who had questions on this type of appraisal or the standards. I have written several articles for the MTS Journal and given presentations regarding the subject at various ASA conferences. I also have given a few independent presentations on the subject to a few private audiences. Over time, it was decided that it would be helpful to consolidate all of the data into a course, which ended up becoming ME215 Performing Machinery and Equipment Valuations for Financial Reporting Purposes.
Why should M&E appraisers be versed in Performing Machinery & Equipment Valuations for Financial Reporting Purposes?
Mergers and acquisitions appraisals, as well as impairment testing can be great sources of income for appraisers. In addition, providing such consulting can open the appraiser up to other projects from previously untapped markets such as tax and audit firms, investment bankers, equity firms, certain attorneys, etc. The same standards and definitions, which are used for financial reporting, are slowly but surely making their way into other areas where appraisers practice.
For example, many leasing companies are now using the same definition of Fair Value utilized for financial reporting and this may soon be the basis of value used by all financial institutions (including banks), where some appraisers get the majority of their work. It is also the same definition of value that is now used in bankruptcy proceedings. Additionally, the valuation practice and profession is continually becoming more global. There is a prominent movement to consolidate the world wide valuation standards around the financial reporting standards that are currently being used. It is important that the valuer understand the standards, the premise of value and how it applies under various scenarios.
What are the major issues or risks M&E appraisers should be aware of?
I would like to make this broader than just MTS appraisers since one of the main issues with valuations performed under the premise of Fair Value are what I call “Team valuations”. An appraisal of one set of assets (i.e. machinery, personal property, real estate, intangible assets) cannot be performed in a vacuum. In this type of valuation, more than any other, the values all interact and can influence each other to a certain extent. For example, the value indicated by the overall Business Enterprise Valuation (BEV) can identify potential economic obsolescence, which needs to be considered by all valuers on the team.
The values finally opined upon or concluded upon become part of the financial statements of the company and an input, which can influence the stock price, and/or financial stability measurement of the company. In addition, the values concluded will be tested for reasonableness on a periodic basis. If the values were overstated, they are subject to what is called an impairment, which has to be noted on the company’s financial statement.
If the values of the tangible and identifiable intangible assets are greater than the purchase price of the company, or the overall BEV, there is a potential for what is called “Negative Goodwill”. The amount, which is deemed “Negative Goodwill”, becomes a capital gain, which is recorded on the financial statements of the company.
Since the values concluded will become part of the financial statements, (and investors do not like surprises, such as unexpected impairment or an unanticipated capital gain) appropriate due diligence and care has to be taken so that the valuation results are reasonable considering ALL of the factors which should have been known as of the valuation date.
All members of the valuation team need to be in constant contact with each other and the individual values need to be communicated throughout the process.
Another factor that needs to be mentioned is that all financial reporting valuations are subject to review by the auditor of the company. The auditor’s job is to assure/opine that the process utilized by the valuers follows appropriate valuation techniques, adheres to the standards, and results in credible conclusions of value. This is why the appraisals need to be well documented. The appraiser should expect their work to be reviewed and be willing to provide data that backs up their conclusions.
Have you ever taught or developed any courses for M&E appraisers?
I have presented at the ASA international conference on many different occasions, presented a few webinars, teach ME201 and ME202 regularly and have developed the ME215 course. I have also presented numerous 1 and 2-day seminars on the topic of Fair Value, etc.
In addition, I have had several articles published in the MTS Journal as well as in a periodical called Valuation Strategies. My latest article in Valuation Strategies was entitled “The Importance of Performing a Business Enterprise Valuation” which was also converted to a webinar format and was presented at the 2012 ASA conference. I also wrote a chapter for the most recent MTS textbook and assisted in the editing of several chapters for that publication.
Are there any external factors driving these issues or risks (i.e. new regulations, lawsuits, client demands etc)?
The standards we follow are constantly changing and the valuer needs to keep abreast of these changes. Currently, the biggest changes are coming on the international front (International Valuation Standards or IVS). Even though these are international, they will affect all appraisers, as the same standards are being adopted by some companies in North America. Also, Canada has adopted the IVS (through their adoption of the International Financial Reporting Standards).
Many of the audit firms are being audited themselves by the Public Company Accounting Oversight Board (PCAOB) which is the “auditor’s auditor”. On several occasions, the audit firms are being told that they have not done adequate due diligence to support the values on the balance sheet. As a result, the audit reviews are becoming more comprehensive and detailed. The appraiser needs to be aware of this and be prepared to answer the detailed questions in a way that assures the audit team that the valuation is materially correct and credible.
You are on the job site about to do an appraisal, what has to be in your tool box?
Before arriving on site, I like to have the following:
- Detailed asset listing which has been reviewed in advance to identify which assets I would like to verify/inspect (I provide the client with the listing of assets I want to verify in advance)
- Answers to a series of detailed questions I send out in advance so the client knows what data I am after while on site
- A general understanding of what the company does and the process they use to do it
I find that having this data ahead of time and holding calls with the client in advance helps prepare them for my visit and makes the time spent on site efficient for all parties. I always remind myself that my client has a business to run and my time on site takes time away from them doing their jobs
While on site, I make sure I have the following:
- Fully charged-up laptop
- Tape measure and flashlight (always!)
- Floor layouts (large enough to read!)
- Memory stick
- Enough data entry forms for the project (I am old fashioned and take paper notes)
- Enough pens and highlighters (yes…different colors for notes, etc. – I am nerdy that way!) for the project
- GPS (never leave home without it!)
- Calculator (for those times when the laptop is not convenient)
- Proper safety gear (steel toe shoes, etc.)
The main factor is to be organized and professional. Clients want to deal with professionals and a professional is always prepared. Forgetting important tools or not dressing professionally or appropriately, does not make a good impression on a client.