By Robert B. Morrion, ASA BV/IA and Alexander Dokuchaev, CFE
We have a recurring client for whom we perform an annual valuation as of December 31. The company is in the conference/event logistics space. We spoke with the client during December and we agreed that the valuation date would be December 31, 2019, that the 2019 audit would be delivered to us by March 1, and that we would have a draft report available by March 31.
Then COVID-19 happened.
In early March, we had another discussion with the client. Their business is taking quite a hit from all the cancelled events worldwide. The client asked how that would affect the value of the company’s equity.
Our response: “It depends”.
It depends on the valuation date and what was known or knowable as of that date. The value conclusion may, and most likely would be wildly different if the valuation date is December 31, 2019 versus, say, March 31, 2020. Knowledge of COVID-19 and its global impact aside, the uncertainty of what the future holds and the heightened systematic and unsystematic risk alone would impact that analysis.
The issue of subsequent events has been fully exposed in our profession. The standards issued by, for example, the ASA and the AICPA are consistent: “Generally the valuation analyst should consider only circumstances existing at the valuation date and up to the valuation date…[s]ubsequent events are indicative of conditions that were not known or knowable at the valuation date”.[1]
Subsequent events may fall into one of two categories: (1) those that affect value and (2) those that do not affect value, but that do give evidence of value that existed on the valuation date.[2] The tax courts also provide a distinction:
“distinction may be usefully drawn between later-occurring events which affect fair market value as of the valuation date, and later-occurring events which may be taken into account as evidence of fair market value as of the valuation date. When viewed in this light—as evidence of value rather than as something that affects value—later-occurring events are no more to be ignored than earlier-occurring events”[3]
“Subsequent events or conditions which affect the value of the property can be taken into account only if they are reasonably foreseeable on the valuation date. Conversely, subsequent events which merely provide evidence of the value of the property on the valuation date can be taken into account, regardless of whether they are foreseeable on the valuation date”[4]
Consideration of known and knowable related to COVID-19 is not as simple as it seems. There has been much conflict and debate (political and otherwise) about who knew what and when and about the seriousness of the pandemic.
The earliest case of COVID-19 was confirmed on or around November 17, 2019, but it was not recognized as a virus at the time.[5] On or around December 30, 2019, news of an outbreak of “pneumonia of unknown origin” began circulating on social media.[6] On or around December 31, 2019, China advised the World Health Organization that cases of pneumonia of an unknown cause were detected in Wuhan, China.[7] This information was readily available through a Google search. At the time, would hypothetical buyers’ due diligence and sellers’ consideration include research related to global health? If so, and this early information regarding what we now know to be COVID-19 was available, how would that knowledge have affected negotiations between our hypothetical parties? Was it possible at that point in time to have foreseen or even speculated the havoc this “pneumonia of an unknown cause” would ultimately have on the economy, the capital markets, and our everyday lives?
The first confirmed case of COVID-19 in the United States was reported by the Centers for Disease Control and Prevention on January 21, 2020.[8] However, it was not until February 24, 2020, when the S&P 500 fell 3.4%[9], that the market seemed to finally react to the pandemic. Even at that point, did we really understand the full impact of the virus? The S&P has fallen an additional 18% since then.
We compiled the attached timeline of events related to COVID-19 to help us evaluate the “known or knowable” issues related to our valuation assignments and wanted to share it with the profession. While we believe our sources are credible, we do not warrant the statements attributed to those sources to be complete or accurate. We suggest that valuers using this timeline perform their own assessment as to the validity of the information.
In the end, we advised our client that as of December 31, 2019, willing buyers and willing sellers of the client’s stock would not have considered what we now know as COVID-19 in their negotiations, as it was not known to be, nor was it knowable as a material risk to the company’s future returns. COVID-19 was a subsequent event that affected value and was not an event that provided evidence of value of the stock on December 31, 2019.
[1] Statement on Standards for Valuation Services No.1, American Institute of Certified Public Accountants (June 2007), pg. 20 at 43.
[2] Pratt, Shannon P. Should subsequent events be considered in the present value of a business entity? BVUpdate, Business Valuation Resources LLC (March 2002).
[3] Estate of Jung v. Commissioner, 101 T.C. 412, 101 T.C. 28 (November 10, 1993).
[4] Morton v. Commissioner, T.C. Memo 1997-166 (April 1, 1997).
[5] https://www.scmp.com/news/china/society/article/3074991/coronavirus-chinas-first-confirmed-covid-19-case-traced-back
[6] https://www.reuters.com/article/us-china-health-pneumonia-idUSKBN1YZ0GP
[7] https://www.who.int/csr/don/05-january-2020-pneumonia-of-unkown-cause-china/en/
[8] https://www.cdc.gov/media/releases/2020/p0121-novel-coronavirus-travel-case.html
[9] https://www.nytimes.com/2020/03/05/us/politics/trump-coronavirus-fact-check.html
COVID-19 Timeline
A timeline of events relating the COVID-19 pandemic
11/17/2019
- Earliest confirmed case of Covid-19; was not recognized as a new virus at the time.[1]
12/1/2019
- A study, by Chinese researchers published in the Lancet medical journal, claimed the first person to be diagnosed with Covid-19 started experiencing symptoms.[2]
12/21/2019
- The first cluster of patients with “pneumonia of an unknown cause” had been identified on 21 December 2019.[3]
12/30/2019
- News of an outbreak of “pneumonia of unknown origin” started circulating on social media on the evening of 12/30/2019.[4]
12/31/2019
- Hong Kong Centre for Health Protection begins monitoring pneumonia like cases in Wuhan.[5]
- China contacts the World Health Organization (WHO) to inform them that cases of pneumonia of unknown cause were detected in Wuhan.[6]
1/3/2020
- A total of 44 patients with pneumonia of unknown etiology have been reported to WHO by the national authorities in China.[6]
- Li Wenliang, a Wuhan ophthalmologist, was summoned to the Wuhan Public Security Bureau where he was told to sign an official confession and admonition letter promising to cease spreading false “rumors” regarding the coronavirus. In late January, The Supreme People’s Court rebuked police for punishing Li and his fellow doctors.[7]
1/6/2020
- United States CDC recommends that travelers avoid all nonessential travel to China.[8]
1/8/2020
- Scientists in China announced the discovery of a new coronavirus.[9]
1/9/2020
- European Centre for Disease Prevention and Control (ECDC) posted its first risk assessment on the Wuhan novel coronavirus outbreak, based on limited information.[10]
- “Considering there is no indication of human-to-human transmission and no cases detected outside of China, the likelihood of introduction to the EU is considered to be low, but cannot be excluded”
1/16/2020
- The Japanese Ministry of Health, Labour and Welfare, informed the World Health Organization (WHO) of a confirmed case of a novel coronavirus (2019-nCoV) in a person who travelled to Wuhan, China.[11]
1/20/2020
- After two medical staff were infected in Guangdong, China announced that the virus was human-to-human transmissible.[12]
- South Korea reports 1st confirmed case of Coronavirus.[13]
1/21/2020
- The Centers for Disease Control and Prevention (CDC) confirmed the first case of 2019 Novel Coronavirus (2019-nCoV) in the United States in the state of Washington.[14]
- The World Health Organization announced that it would hold an emergency meeting on the virus the following day to determine if the virus is a “public health emergency of international concern.[15]
1/23/2020
- Officials announce a quarantine of the greater Wuhan, China area to commence at 10:00 am. No traffic will be allowed in or out of the city.[16]
1/24/2020
- Multiple tourist destinations, restaurants, and movie theatres were ordered to be closed in China until further notice including: Shanghai Disney, Starbucks, and McDonalds.[17][18]
- Four U.S. senators sold began selling stock after receiving sensitive briefings in late January about the emerging threat of the coronavirus.[19]
1/25/2020
- Hong Kong declared a state of emergency and announced it would close schools until 17 February.[20][21] Hong Kong Disneyland and Ocean Park are closed until further notice.[22]
1/27/2020
- 2,798 Confirmed cases found in 12 countries: China, Japan, Republic of Korea, Vietnam, Singapore, Australia, Malaysia, Thailand, Nepal, USA, Canada, France.[23]
- The Shanghai government has said companies in the city are not allowed to resume operations before Feb. 9. The measure is applicable to government and private companies but is not applicable to utilities and some other firms such as medical equipment companies and pharmaceutical companies.[24]
- The US State Department raised the travel advisory for China to Level 3 (“Reconsider Travel: Avoid travel due to serious risks to safety and security.[25]
1/29/2020
- President Trump tweeted: “Just received a briefing on the Coronavirus in China from all of our GREAT agencies, who are also working closely with China. We will continue to monitor the ongoing developments. We have the best experts anywhere in the world, and they are on top of it 24/7!”[26]
1/30/2020
- The WHO director-general declares the coronavirus outbreak a “Public Health Emergency of International Concern”[27]
- The US State Department issued an updated travel advisory as “Level 4: Do Not Travel to China.” Its website stated that “Those currently in China should consider departing” and warning that “Travelers should be prepared for travel restrictions to be put into effect with little or no advance notice”[28]
1/31/2020
- The United States government declares a Public Health Emergency due to the coronavirus, and is closing its borders to all foreign nationals “who pose a threat of transmitting the virus from entering the country and would quarantine U.S. citizens returning from Hubei province in China, the epicenter of the outbreak, for up to 14 days,” starting Sunday, February 2 at 5 p.m.[29]
2/2/2020
- President Trump spoke with the Fox News personality Sean Hannity: “We pretty much shut it down coming in from China,” Mr. Trump said of the coronavirus. “But we can’t have thousands of people coming in who may have this problem, the coronavirus. So, we’re going to see what happens, but we did shut it down, yes.”[30]
2/6/2020
- The Department of Health and Human Services (HHS) has asked the Pentagon to find military installations near 11 major airports that could potentially house up to 220 U.S. citizens quarantined due to the novel coronavirus.[31]
2/7/2020
- The White House on Thursday asked U.S. scientists and medical researchers to investigate the scientific origins of the novel coronavirus, as misinformation about the outbreak spreads online.[32]
- The Federal Reserve Bank warns that the virus is a potential threat to the growth of the US economy.[33]
2/11/2020
- New Coronavirus Disease Officially Named COVID-19 By The World Health Organization[34]
2/15/2020
- The United States announced it would evacuate Americans currently aboard the cruise ship Diamond Princess.[35]
2/23/2020
- Italy introduces strict measures which place almost 50,000 people in lockdown in an attempt to control the virus. Fines are imposed on those caught entering or leaving outbreak areas.[36]
2/24/2020
- The S & P 500 falls 3.4 percent, the worst single day in two years. The death toll has surpassed 2,600. U.S. cases have reached 53. This is the start of the massive decline in the United States stock markets.[37]
- President Trump tweets: “The Coronavirus is very much under control in the USA. We are in contact with everyone and all relevant countries. CDC & World Health have been working hard and very smart. Stock Market starting to look very good to me!”[38]
2/25/2020
- In the United States, CDC officials warned that community transmission of COVID-19 was expected, urging local governments, schools and businesses to develop plans to deal with potential outbreaks. In addition, disruptions to drug supplies could also be expected.[39]
2/26/2020
- The World Health Organization reported that the number of new cases outside China had exceeded the number of new cases in China for the first time on 25 February, after a spike of cases in Italy, Iran and South Korea with cases in China dropping.[40]
- President Trump puts Mike Pence in charge of US coronavirus response.[41]
2/27/2020
- Due to mounting worries about the coronavirus outbreak, various U.S. stock market indices including the NASDAQ-100, the S&P 500 Index, and the Dow Jones Industrial Average posted their sharpest falls since 2008, with the Dow falling 1,191 points, its largest one-day drop since the 2008 financial crisis.[42]
- The World Health Organisation urged countries not to assume that they will be spared the coronavirus, pointing out that it would be a “fatal mistake” to do so. It also warned that the virus “has pandemic potential”.[43]
2/28/2020
- The World Health Organization raised the coronavirus alert to the highest level.[44]
2/29/2020
- The United States bans travel from Iran, and increases its travel warnings to Italy and South Korea.[45]
- The governor of Washington state declared a state of emergency after a man died there of COVID-19, the first such reported death in the United States.[46]
3/3/2020
- The Federal Reserve cuts interest rates by half a point. The stock market continues to slump.[47]
3/4/2020
- CDC Says ‘Do Not Go to Work,’ Trump Says Thousands With Coronavirus Could Go to Work and Get Better.[48]
3/6/2020
- In Austin, Texas, the major music and media festival SXSW has been cancelled for the first time in its 34-year history.[49]
3/9/2020
- Ohio governor Mike DeWine declared a state of emergency after Ohio reported its first cases of COVID-19.[50]
- Italy imposes a country-wide quarantine, restricting travel except for necessity, work, and health circumstances.[51]
3/10/2020
- Massachusetts Governor Charlie Baker declared a state of emergency as the number of cases doubled overnight, to 92. 70 of the cases were related to a meeting at Biogen in February. Harvard University ordered its students to vacate the campus by Sunday, March 15.[52]
3/11/2020
- The NBA suspended all games starting Thursday after a player for the Utah Jazz preliminarily tested positive for COVID-19.[53]
- The World Health Organization declared the COVID-19 outbreak a pandemic after cases outside China increased 13-fold over the past two weeks.[54]
- S. President Donald Trump announced that all travel from Europe (except UK) into the United States will be suspended for 30 days.[55]
3/12/2020
- Stock markets worldwide suffer their greatest single-day fall since the 1987 crash in response to the coronavirus pandemic and the previous day’s announcement of the 30-day travel ban between the U.S. and Europe.[56]
3/13/2020
- S. President Donald Trump declared a national state of emergency, allocating about $50 billion of U.S. federal government money for relief efforts.[57]
3/15/2020
- Federal Reserve slashes interest rates to zero as part of wide-ranging emergency intervention.[58]
3/16/2020
- President Donald Trump on Monday issued guidelines that called for Americans to avoid social gatherings of more than 10 people and to limit discretionary travel.[59]
3/19/2020
- California Gov. Gavin Newsom orders the first statewide mandatory restrictions in the United States. Residents are not allowed leave home except for essential things such as food, prescriptions, health care and commuting to jobs considered crucial.[60]
3/20/2020
- New York Governor Andrew Cuomo issued a state-wide order that all non-essential workers must stay at home.[61]
3/24/2020
- The International Olympic Committee and the Tokyo 2020 Organizing Committee announce that the 2020 Tokyo Olympic Games and the 2020 Tokyo Paralympic Games will be postponed to a date beyond 2020 but no later than summer 2021.[62]
[1] https://www.scmp.com/news/china/society/article/3074991/coronavirus-chinas-first-confirmed-covid-19-case-traced-back
[2] http://www.bbc.com/future/article/20200221-coronavirus-the-harmful-hunt-for-covid-19s-patient-zero
[3] http://weekly.chinacdc.cn/en/article/id/a3907201-f64f-4154-a19e-4253b453d10c
[4] https://www.reuters.com/article/us-china-health-pneumonia-idUSKBN1YZ0GP
[5] https://www.info.gov.hk/gia/general/201912/31/P2019123100667.htm
[6] https://www.who.int/csr/don/05-january-2020-pneumonia-of-unkown-cause-china/en/
[7] https://www.bbc.com/news/world-asia-china-51364382
[8] https://wwwnc.cdc.gov/travel/notices/warning/novel-coronavirus-china
[9] https://www.wsj.com/articles/new-virus-discovered-by-chinese-scientists-investigating-pneumonia-outbreak-11578485668
[10] http://www.cidrap.umn.edu/news-perspective/2020/01/pressure-builds-china-share-info-new-coronavirus
[11] https://www.who.int/csr/don/16-january-2020-novel-coronavirus-japan-ex-china/en/
[12] https://www.theguardian.com/world/2020/jan/20/coronavirus-spreads-to-beijing-as-china-confirms-new-cases
[13] https://en.yna.co.kr/view/AEN20200120004500320
[14] https://www.cdc.gov/media/releases/2020/p0121-novel-coronavirus-travel-case.html
[15] https://www.channelnewsasia.com/news/asia/wuhan-pneumonia-coronavirus-china-confirms-human-transmission-12293414
[16] https://www.npr.org/sections/goatsandsoda/2020/01/22/798602296/public-transport-in-wuhan-suspended-due-to-coronavirus-concerns
[17] https://www.cnn.com/2020/01/24/business/disneyland-china-wuhan-virus/index.html
[18] https://finance.yahoo.com/video/starbucks-becomes-latest-company-suspend-204326325.html
[19] https://fortune.com/2020/03/20/senators-burr-loeffler-sold-stock-coronavirus-threat-briefings-in-january/
[20] https://www.businessinsider.com/hong-kong-shutting-down-schools-until-february-17-over-coronavirus-2020-1
[21] https://www.cbsnews.com/live-updates/coronavirus-usa-confirmed-cases-news-death-toll-latest-2020-02-04/
[22] https://www.reuters.com/article/us-china-health-disneyland-idUSKBN1ZP02F
[23] https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200127-sitrep-7-2019–ncov.pdf?sfvrsn=98ef79f5_2
[24] https://www.reuters.com/article/us-china-health-shanghai-idUSKBN1ZQ0M0
[25] https://www.reuters.com/article/us-china-health-disneyland-idUSKBN1ZP02F
[26] https://twitter.com/realDonaldTrump/status/1222672488934584324?s=20
[27] https://news.yahoo.com/world-health-organization-declares-chinas-coronavirus-a-global-health-emergency-less-than-week-after-deciding-not-to-194416398.html
[28] https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/china-travel-advisory.html
[29] https://www.cnbc.com/2020/01/31/white-house-to-hold-briefing-on-coronavirus-friday-afternoon.html
[30] https://www.nytimes.com/2020/02/02/us/politics/trump-super-bowl-interview-coronavirus.html
[31] https://thehill.com/policy/defense/481934-pentagon-to-provide-military-installations-near-11-major-airports-for
[32] https://abcnews.go.com/Politics/white-house-asks-scientists-investigate-origins-coronavirus/story?id=68807304
[33] https://www.federalreserve.gov/monetarypolicy/2020-02-mpr-summary.htm
[34] https://www.npr.org/sections/goatsandsoda/2020/02/11/802352351/new-coronavirus-gets-an-official-name-from-the-world-health-organization
[35] https://www.nytimes.com/2020/02/15/world/asia/japan-cruise-ship-coronavirus.html
[36] https://www.theguardian.com/world/2020/feb/23/italy-draconian-measures-effort-halt-coronavirus-outbreak-spread
[37] https://www.nytimes.com/2020/03/05/us/politics/trump-coronavirus-fact-check.html
[38] https://twitter.com/realDonaldTrump/status/1232058127740174339?s=20
[39] https://www.channelnewsasia.com/news/world/covid-19-authorities-expect-community-spread-us-soil-12470978
[40] https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-mission-briefing-on-covid-19—26-february-2020
[41] https://www.cnn.com/2020/02/26/politics/trump-coronavirus-stock-market/index.html
[42] https://www.cnn.com/2020/02/27/investing/dow-stock-market-selloff/index.html
[43] https://www.straitstimes.com/world/europe/fatal-mistake-for-countries-to-assume-they-wont-get-coronavirus-says-who-chief
[44] https://www.straitstimes.com/world/europe/who-upgrades-global-risk-of-coronavirus-spread-to-very-high
[45] https://abc13.com/5975831/
[46] https://abcnews.go.com/US/wireStory/coronavirus-cases-unknown-origin-found-west-coast-69301250
[47] https://www.barrons.com/articles/dow-jones-industrial-average-drops-200-points-as-coronavuirus-fears-remain-51583246460
[48] https://www.commondreams.org/news/2020/03/05/cdc-says-do-not-go-work-trump-says-thousands-coronavirus-could-go-work-and-get
[49] https://www.nytimes.com/2020/03/06/arts/music/sxsw-cancelled.html
[50] https://www.10tv.com/article/3-confirmed-cases-coronavirus-ohio-dewine-declares-state-emergency-2020-mar
[51] https://time.com/5799873/italy-coronavirus-travel-restrictions/
[52] https://www.cnbc.com/2020/03/10/massachusetts-declares-emergency-as-coronavirus-cases-double-overnight-with-51-new-infections.html?recirc=taboolainternal
[53] https://www.nbcnews.com/news/us-news/nba-suspends-remainder-season-coronavirus-spreads-n1156156
[54] https://www.bbc.com/news/world-51839944
[55] https://www.bbc.com/news/world-us-canada-51846923
[56] https://www.bbc.com/news/business-51829852
[57] https://www.cnn.com/2020/03/13/politics/donald-trump-emergency/index.html
[58] https://www.washingtonpost.com/business/2020/03/15/federal-reserve-slashes-interest-rates-zero-part-wide-ranging-emergency-intervention/
[59] https://www.usatoday.com/story/news/health/2020/03/16/coronavirus-live-updates-us-death-toll-rises-cases-testing/5053816002/
[60] https://www.nbcnews.com/news/us-news/california-issues-statewide-stay-home-order-coronavirus-fight-n1164471
[61] https://www.wsj.com/articles/new-york-gov-cuomo-orders-all-nonessential-workers-in-state-to-stay-home-11584718223
[62] https://www.olympic.org/news/joint-statement-from-the-international-olympic-committee-and-the-tokyo-2020-organising-committee
Robert B. Morrison, ASA BV/IA is a Partner and the Firm Leader of the Business Advisory Team of Rosenfield & Company, PLLC. Mr. Morrison is the former International President of the American Society of Appraisers. Rosenfield & Co. is a full-service accounting, tax, and consulting firm with offices in Florida, New York, and New Jersey. Rosenfield & Co. is a member firm of the American Business Appraisers National Network.
Alex Dokuchaev is an analyst on Rosenfield & Co.’s Business Advisory Team. He has a Masters’ degree in Accountancy and is pursuing his ASA.
