124 Accounting issues in family law

Transcription

1 124 Accounting issues in family law by J Exner BEc, ACA [Original author] Update: 51

2 EXPERT EVIDENCE Author information Jennifer Exner, BEc, ACA, is a Partner in the Forensic practice of Deloitte Touche Tohmatsu in Sydney. She has approximately 25 years experience advising privately owned and managed businesses on financial management, audit and taxation issues, gaining significant experience in dealing with accounting and commercial issues facing companies, partnerships, trusts, superannuation funds, sole traders and high net worth individuals. Jennifer has specialised in forensic litigation for more than 20 years. She has provided expert witness testimony in the Family Court of Australia and other jurisdictions, in matters involving the valuation of businesses, professional service firms and intangible assets. She has also given advice in respect of the quantification of damages, criminal matters and personal injury cases. Jennifer s professional work has also included the provision of valuation advice in matters relating to capital gains tax and stamp duties legislation. The information contained in this Chapter is intended to be a brief outline for legal practitioners and other professionals of the role of the accounting expert in the context of family law. As such, the author has given an overview of the particular issues that may arise during the course of a financial investigation. As a valuation requires a certain amount of subjective judgment, each expert will take a different approach to an investigation and presentation of findings so the reader cannot rely upon this Chapter as providing definitive answers to every situation. Neither the author, Deloitte Touche Tohmatsu, nor any employee of Deloitte Touche Tohmatsu accepts any responsibility for any information relied upon in this Chapter. Chapter 124 J Exner Published with permission of the author Expert Evidence

3 TABLE OF CONTENTS INTRODUCTION... [124.10] MANAGING THE ENGAGEMENT... [124.50] Litigation engagement letters... [124.60] Contents of the engagement letter... [124.70] Contingency fees... [124.80] Discovery and inspection of documents... [124.90] Other useful documents... [ ] PREPARATION OF THE REPORT Report structure... [ ] Features of a written report... [ ] Experts conference... [ ] VALUATION CONCEPTS What is value?... [ ] Value in the family law context... [ ] Value to the owner... [ ] Fair value versus fair market value... [ ] Going concern value... [ ] Value in use... [ ] Value in exchange... [ ] Date of valuation... [ ] VALUATION METHODOLOGIES... [ ] Discounted cash flow valuations... [ ] Earnings-based valuations... [ ] Dividend-based valuations... [ ] Asset-based valuations... [ ] Rule of thumb methods... [ ] PREMIUMS AND DISCOUNTS... [ ] Control premiums... [ ] Discounts for minority interest... [ ] Arguments for and against minority interest discounts... [ ] Marketability discounts... [ ] THE IMPACT OF TAXATION... [ ] Rate of income tax... [ ] Tax on revaluation of tangible assets... [ ] Franking credits... [ ] Value of income tax losses... [ ] Capital gains tax and realisation costs... [ ] Goods and services tax... [ ] Demergers... [ ] Pay as You Go tax instalments and prepaid tax... [ ] Use of earnings multiples pre- or post-tax... [ ] CONTROVERSIAL ISSUES Deferred ownership... [ ] Professional goodwill and the super profits method... [ ] Personal versus commercial goodwill... [ ] Existing formula... [ ] Saleability... [ ] Method of calculating value of super profits... [ ] Dealing with long-term employee incentive plans... [ ] TYPICAL CONSULTING ENGAGEMENTS... [ ] Tracing assets... [ ] Preparation of Financial Statement (Form 13)... [ ] Analysis of loan accounts... [ ] Settlement negotiations... [ ] Stamp duty... [ ] Child maintenance trusts... [ ] Shareholder loan accounts... [ ] Capital gains tax... [ ] Change of ownership of assets... [ ] Update: 51

4 EXPERT EVIDENCE The matrimonial home... [ ] SUPERANNUATION ENTITLEMENTS... [ ] BINDING FINANCIAL AGREEMENTS... [ ] SECTION 79A APPLICATIONS... [ ] APPENDIX 1 JONES V JONES: SAMPLE RULE JOINT STATEMENT OF EXPERT WITNESSES... [ ] APPENDIX 2 USEFUL REFERENCES FOR INDUSTRY AND STATISTICAL INFORMATION... [ ] BIBLIOGRAPHY [The next text page is ] Expert Evidence

5 ABBREVIATIONS Abbreviations CGT...capital gains tax CPA Australia...Association of Certified Practising Accountants in Australia DCF...discounted cash flow EBIT...earnings before interest and tax GST...goods and services tax ICAA...Institute of Chartered Accountants in Australia PAYG...Pay as You Go WACC...weighted average cost of capital Update: 51

6 EXPERT EVIDENCE Expert Evidence

7 Glossary accounting terminology a glossary of accounting terminology (eg assets, liabilities, etc) is provided in Chapter 123. business assets (and liabilities) those assets (and liabilities) of the entity that are central to business operations and the generation of business revenue. Commonly includes stock, plant and equipment and any liabilities associated with business assets, eg borrowings to finance the acquisition of plant and equipment and employee entitlements. Compare with surplus assets (and liabilities). carrying amount also referred to as net book value, book value or written down value. The carrying amount is the amount at which an asset or liability is recorded in the financial statements and/or accounting records of an entity at a particular date. This amount is determined after deducting any accumulated depreciation and accumulated impairment losses. director s valuation a valuation that is not an independent valuation. GLOSSARY financial resources includes a prospective claim or entitlement (eg long service leave and annual leave), or an interest that may vest in one or both of the parties in the future (eg an interest in a discretionary trust), or any other valuable benefits that are not property, or else are not treated as property. EBIT the annual earnings of a business or entity before the deduction of interest and tax. entity any legal, administrative or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives. expert an independent person who has relevant specialised knowledge, based on the person s training, study or experience but does not include a mediator or an expert appointed by a party for a purpose other than the giving of advice or evidence, or the preparation of a report for a case or anticipated case (Family Law Rules 2004 (Cth), r 15.43). expert witness an expert who has been instructed to give or prepare independent evidence for the purpose of a case (Family Law Rules 2004 (Cth), r 15.43). expert s report a report by an expert witness (Family Law Rules 2004 (Cth), r 15.43). financial statements the accounts of an entity, often prepared annually. The financial report of a company for a financial year is defined in s 295 of the Corporations Act 2001 (Cth) to consist of financial statements, notes to financial statements and the directors declaration about the statements and notes. goodwill the future economic benefits from intangible assets that are not capable of being individually identified and separately recognised. independent valuation a valuation conducted by an appropriately qualified person who is and is seen to be free of any interest which is incompatible with objectivity. intangible assets for the purpose of this Chapter, includes identifiable non-monetary assets that do not have a physical substance but are severable (eg, by way of sale), such as brand names, mastheads and licences, as well as unidentifiable assets such as goodwill. option a financial instrument that gives the holder the right (but not the obligation) to acquire or sell an asset, such as ordinary shares Update: 51

8 EXPERT EVIDENCE parties the parties to a marriage (or de facto relationship). property in relation to the parties or either of them, means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion (Family Law Act 1975 (Cth), s 4). revaluation the act of recognising a reassessment of the value of assets and liabilities in the financial statements of an entity at a particular date. single expert witness an expert witness who is appointed by agreement between the parties or by the court to give evidence or prepare a report on an issue (Family Law Rules 2004 (Cth), r 15.43). surplus assets (and liabilities) those assets (and liabilities) not used in the business. An example of surplus assets would be the passive investments (eg, a share portfolio) of a manufacturer. Compare with business assets (and liabilities). [The next text page is ] Expert Evidence

9 INTRODUCTION [124.10] Since 1975 when the concept of no fault divorce was introduced in Australia, there has been considerable change in community attitudes toward marriage and divorce and an increase in the rate of divorce. At the same time, many people operate their own businesses and cannot readily place a value on those businesses for the purpose of property settlement proceedings. The role of the forensic accountant in the context of family law is to assist the court by providing an independent expert opinion in relation to the value of businesses and other financial interests, such as loans and superannuation entitlements, where that value cannot be easily determined. Once such expert evidence has been considered, the court will then determine the value of the property and how the net property interests of the parties to the proceedings will be distributed. The jurisdictions in which these proceedings are held are the Family Court of Australia and the Federal Magistrates Court of Australia, which have jurisdiction in cases involving marriages, or matrimonial causes (by way of the Family Law Act 1975 (Cth)) and the Supreme Courts, which have jurisdiction in cases involving de facto relationships (by way of, eg, the Domestic Relationships Act 1994 (ACT)). An accountant acting as an expert valuer can be retained by a solicitor to provide expert evidence of a financial nature on many issues, including the value of interests in private entities (such as family companies, trusts and partnerships), analyses of the financial contributions of the parties, tracing of assets and assistance with the preparation of documents to be filed in the proceedings, such as the Financial Statement (Form 13). The accounting expert may also assist with matters concerning settlement negotiations. Some of these activities will be undertaken on behalf of both parties, in circumstances where the accountant is appointed to act as a single expert witness. This Chapter provides some detail on these areas of investigation and valuation and seeks to highlight some of the issues that the accounting expert will commonly encounter. It also provides some guidance on the process of giving expert witness testimony. There is a substantial amount of professional guidance from the Institute of Chartered Accountants in Australia (ICAA) and the Association of Certified Practising Accountants in Australia (CPA Australia) in relation to the principles of professional conduct for an accounting expert who is providing forensic accounting services for the purpose of litigation proceedings. Relevant pronouncements include: APES 215 Forensic Accounting Services, which provides both general standards and performance standards that should be adopted when providing forensic accounting services; APES 110 Code of Ethics for Professional Accountants, which addresses professional competence, behaviour and independence issues; and APES 225 Valuation services, which provides both general standards and performance standards that should be adopted when providing forensic valuation services Update: 51

10 [124.10] EXPERT EVIDENCE APES 305 Terms of Engagement, which provides both general standards and guidance on matters to be included in an engagement document. Since 1998, various Federal, Supreme and District Courts have issued codes of conduct and practice directions for the benefit of expert witnesses. In particular, Pt 15.5 of the Family Law Rules 2004 (Cth) provides instructions to single expert witnesses acting in family law proceedings: see [ ]). These rules encompass the process of an expert witness s appointment, their duty to the court, their rights, and the required form and content of their reports. As regards valuation assignments, there is no universally agreed set of valuation techniques, either at a macro level (eg that would dictate the appropriate methodology to adopt) or at a micro level (eg that would prescribe the appropriate discount rate to use in a specific circumstance). The ICAA has established the Business Valuation Special Interest Group, whose mandate includes providing technical expertise and formulating policy for professional business valuers. However, in matters of business valuation, the judgment and experience of the accounting expert remain crucial as the subject area does not lend itself to prescriptive solutions. Typically, business valuers retained as expert witnesses in family law proceedings have achieved professional accreditation (such as membership of the ICAA or CPA Australia) and have extensive experience in the fields of tax, accounting, finance and financial management. Some of these skills can be developed by further study. However, as always, there is no substitute for experience. [The next text page is ] Expert Evidence