What risk free rate are you using now, after all the debate?


After all the ink that’s been spilled, few people have changed the risk free rate.   In a room of 500 appraisers, only a few would (publically) admit to making adjustments.  Here are a few comments from the AICPA National BV Conference:

    o “Rates were so low at 12/31/08, we switched for awhile to an RFR that was an average of the preceding 12 months. We switched back to using date-of-valuation risk free rates a few months back.”

    o “I average the RFR over a long period of time because we never know where that’s going to go.”

    Rob Burkert comments that these approaches will look different to judges and others who look at your reports...but that’s OK, as long as you support why you made the judgment.   Rod imagines a judge saying “Mr, Burkert, you’ve used a day-of risk free rate in your last fifteen reports, but now you’re averaging.  Isn’t this because you were hired by the party who wanted a higher value?”  Preparation is required.

    Another attendee says he regularly adjusts ERP from what he gets from SBBI or D&P.;   The reason:   “these are look-back numbers, and may not make sense at a point when people are panicking.”  Burkert points out that lots of analysts think the ERP already includes adjustments for these changing expectations.  

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