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Personal Financial Statements: Why They Matter – Part II

The first installment of this two-part blog presented an overview of the reasons for which you would need a personal financial statement, the components included and the basis under which a personal financial statement can be prepared. This installment aims to discuss how estimated current value of assets and liabilities are determined. For information on why you would need a personal financial statement, or the components included, click here for Part I.

Estimated current value should be based on the most recent transactions involving similar assets in similar circumstances such as quoted or published market prices. When these transactions are not available, however, the following methods should be used:

• Capitalization of past or future earnings
• Liquidation value
• Historical cost adjusted based on changes in a specific price index
• Appraisals
• Basis of discounted project cash receipts or disbursements

In order to help you determine the value of your assets, the following summarizes the methods recommended by FASB for specific assets or group of assets:

Receivable – The amount of expected cash to be collected, discounted using appropriate interest rate at the specified date

Marketable Securities – The quoted market price (if traded on the specified date)
• If not traded on the specified date, the value of the securities should be within the range of the published bid, and ask if available.
•  If traded over the counter, the average of the bid prices (or bid and asked prices, or the prices of a selection of broker dealers quoting the securities) may be used.
• If you are holding restricted securities, a large block of a particular security, or holding a minority or controlling interest, the estimated current value of these securities may need to be adjusted.

Options – At published prices
• When published prices are not available, the price should be based on the value of the asset subject to option, taking into consideration the exercise price and the length of the option period.

Life Insurance – Cash value, less loan outstanding, if applicable.

Investments in Closely Held Businesses
• Multiples of Earnings
• Liquidation Value
• Reproduction Value
• Appraisal
• Discounted Projected Cash Receipts and Disbursements
• Adjusted Book value or cost of the interest
• Amount reported in buy-sell agreement, if applicable.

An investment in a closely held business is the most difficult to value. The method used needs to be appropriate for the type of entity being valued, keeping in mind that the objective is to approximate the estimated current value as defined by FASB.

Investments in closely held businesses include proprietorships, joint ventures, S corporations and partnerships. If the investments represent a large portion of the individual’s total assets, then they should be reported separately from other investments.

Real Estate
• Sales of similar property in the area
• Discounted projected cash flows
• Appraisal (based on estimates from independent real estate agent or brokers familiar with similar properties in similar area; used to obtain financing)
• The assessed value for property taxes may be used. However, the basis of that assessment must be compared in relation to the market values in the area.

Intangible – At the discounted value of projected cash flows, using an appropriate interest rate at the specified date. This method can be used if both the amount and timing of cash flows can be reasonably estimated (otherwise the cost may be the best value of a purchased intangible).

Future Interests – Includes interests in profit sharing or pension plans
• At the discounted amount of estimated future cash receipts, using an appropriate interest rate at the specified date.

This type of asset should only be included if the future right is for a fixed or determinable amount and the right is not contingent on the owner’s life expectancy or the occurrence of a particular event, such as disability or death.

Personal Effects – Includes items such as art, jewelry and household furnishings (should only be included if they are material).

Social Security Benefits
• Included if you are already collecting social security. The asset should be valued at the discounted value of future benefits over the individual’s estimated life expectancy.
• Not included if you are not currently collecting social security. In this situation benefits are not included because (1) the amounts are not determinable, since they depend on the age at which the person chooses to retire, (2) rights to collect are contingent on reaching a specific retirement age, and (3) may require future performance if retirement benefits are not yet earned.

Payables and liabilities should be reported at the discounted amount of cash to be paid. The discount rate should be the interest rate implicit in the transaction. If the debt currently can be discharged at a lower amount, then the lower amount should be reported on the personal financial statements.

Regardless of which method is used—unless circumstances change—the method should be consistently applied from one period to the next.

The last component to be discussed is the provision for estimated income taxes on the difference between the estimated current values of assets and current amounts of liabilities and their tax bases.

The provision should be calculated assuming all estimated current values of assets have been realized and the estimated current amount of all liabilities has been liquidated on the specified date. This area is too broad to be discussed for the purposes of this blog series, as it would involve determining the tax basis of each asset and liability type or group.

Putting together a personal financial statement can be a daunting task, depending on the complexity of your individual assets and liabilities. The components you will need to consider when undertaking the preparation of personal financial statements will differ based on your specific scenario, and for that reason it is always recommended that you consult with your financial and/or accounting advisor(s) to ensure you are taking all necessary steps into accounts. Here at FF&F our experienced staff will act as your advisors before and throughout each of these steps to help you confidently compile your personal financial statements. For more information on this topic, or to hear about our services, please contact us at info@fffcpas.com or (212) 245-5900.

MP HeadshotMarisa Pershad, CPA, CVA, is an Accounting & Audit Partner at Farkouh, Furman & Faccio with over 35 years of experience. Marisa’s industry expertise includes clients predominantly in the commercial, financial services (including investment partnerships and broker-dealers), and not-for-profit industries. She specializes in the audit of GAAP and OCBOA basis financial statements.