The "Five Stages of Denial" may be considered the components of the
psychological process by which people deal with unfortunate or unpleasant
circumstances. And nowadays, we have seen this process, and the psychological
character of our clients, reflected during our valuation engagements.
Mostly we have experienced this in impairment reviews. As Dr. Valuation, we have
seen the typical process play out in various ways.
• Stage 1, Reality Warping: "Just because my
stock price is down
82%, we are not impaired because I met plan." Or, "My
level 3
assets are fine because the only trades happening
are not at 'real
prices,' and are only distressed sales that don't apply
to me." • Stage 2, Anger: "It's not fair! I'm
outperforming all of my peer
group." And "Why me? I never levered up my balance
sheet or did
crazy acquisitions like those guys!"
• Stage 3, Bargaining: "If we just suspend
mark-to-market
accounting, my balance sheet will be fine." Or, "my
stock price is
only temporarily depressed ─
just give me until Q3."
• Stage 4, Depression: "My bank covenants!" My
bonus pool! My
board member who never liked that deal anyway!"
• Stage 5, Acceptance: "We'll bite the
bullet." And "Everyone's in
the same boat so I'm feeling okay about it." And most
commonly,
"That's all? I was thinking (or hoping) for more of a
write-down.
While we're at it, are you sure your discount rate is
high enough?"
These impairment studies ─ whether
at the entity
or reporting unit level (most often for FAS 142 goodwill impairment reviews)
or at the individual asset levels (under FAS 144 and FAS 157)
─ have definitely
seen the shifting tides of time. Two years ago, we wore the hat of "bad
cop," often having to wrestle with our clients about the extent of the
impairment. Many CEOs were NOT going to readily take an impairment charge on
their pet acquisitions. Now, there has been much less resistance in what would
previously have been Stages 1 to 3. (Not quite enough that many now think of us
as the "good cop," but at least there is less contention.)
The recent run-up in most stock prices has definitely been a relief to many,
and taken many back from the edge of Stage 4, depression. But for many, their
recent reporting of impairment ─ often driven then by stock prices that were
then at what were their multi-year lows ─ was quite a shock to the system. Not
only did they have to present their write-offs to their boards, but they also
had to wrestle with their external auditors about them; adding enough insult to
injury to depress just about anyone.
MISERY LOVES COMPANY
There is also certainly a "misery loves company" or safety in number
sentiment now being experienced in Stage 5. Like a type of collective
schadefreude -─ or the emotional upside of another's misfortune ─ Stage 5
today might also be described as paired impairment, or relief
in common impairment.
VRC assists clients with not only impairment studies, but also as a "support
group" for FAS 157 review (including review of one's own internal models),
purchase price allocation, stock-based compensation, fairness opinions, and
other fair value analyses, as well as in the perhaps ultimate Stage 5 recovery
and acceptance phase: fresh start accounting.
For questions or more information, contact one of our valuation "doctors,"
Raymond Weisner at 212-983-3370 and let him know where it hurts. VR
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