Fair Value Measurements for Business Combinations and Impairment Testing
In an ever more complex economic environment, comptrollers, auditors, CPAs, finance executives and other related practitioners face considerable challenges when applying accounting standards related to fair value, business combinations and impairment testing. To avoid potential pitfalls, practitioners and preparers must need to be in the know with respect to the most significant issues regarding fair value measurements for business combinations and impairment testing. In this two-hour live webcast, panel members will offer a refresher and critical updates of these accounting rules. They will discuss: Fair Value Measurements (ASC 820/SFAS 157), Business Combinations and the Acquisition Method of Accounting, ASC 805 (SFAS 141R) and Impairment Testing Tips, ASC 350 and 360 (SFAS 142 and 144).
Vinay Torani, Managing Director,
Duff & Phelps, LLC
Linda MacDonald, Senior Managing Director,
- Interaction Bus Comb + FV, and some considerations discussed when FASB developing the FV guidance at FASB
- Driver = market participant assumptions
- highest and best use approach for assets not going to use + defensive assets
Highlight some areas of focus by SEC
- Disclosures about things like customer relationships, contingent consideration…
FASB/FAF 141R post implementation review (now complete)
- Issues identified
FASB/FAF 157 post implementation review (in process)
- Issues to be identified, but a focus of the review is on application of guidance in bus comb situation + reliance on the outside valuation specialist
Possibility of future standard setting activities to respond to the reviews
In the interim, private company relief re: FV
Gunther Hofmann, CFA, AVA, Vice President,
The Brenner Group
- General Overview:
It may be helpful to provide attendees with a general overview of a purchase price allocation and then dive into some specific topics.
Within that framework, we could focus on the following:
Assets and Liabilities
An acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date if they meet the definitions of assets and liabilities. Practitioners involved in accounting for Business Combinations need to know the main principles and specifics of the assets identification process.
- Grouping of Intangible Assets acquired
Some intangible assets are recognized only in conjunction with other assets, as they cannot be disposed of individually, but only in a group. Aggregating multiple intangible asset categories that may have different attributes and economic characteristics into a single intangible asset is a common issue when measuring the Fair Value of Intangible Assets.
- Determining the Useful Life of Intangible Assets
Measuring assets based on the expected use by a market participant rather than an entity’s own intended use presents a number of accounting challenges, particularly from a post-acquisition perspective, including the assessment of useful life. Failing to properly assess the economic life of an asset is a common issue when measuring the Fair Value of Intangible Assets.
- Valuation Approaches
It might be helpful to present a general overview of the different valuation approaches to set the stage for some more in-depth discussion of some of specific approaches later (such as the distributor approach put forward by VRC).
- Other Topics of Current Relevance
- Higest and Best Use Assumption
Accounting standards require the valuation of acquired assets at its highest and best use, which may not necessarily be the intended use of the acquirer. This dichotomy often leads to confusion in the preparation of the valuation.
- Market Participant Theory
U.S. GAAP requires the consideration of market participant assumptions in measuring the fair value of assets acquired and liabilities assumed in a business combination. This theory is one of the most important but often ignored by practitioners in the accounting for Business Combinations. Practitioners and preparers must know Market Participant assumptions and be able to identify and analyze possible Market Participant synergies versus Entity specific characteristics.
- Consideration transferred
The consideration transferred in a transaction may include cash, other assets, contingent consideration, a subsidiary or a business of the acquirer transferred to the seller, common or preferred equity instruments, options, warrants, and member interests of mutual entities. Measuring and recognizing consideration transferred is no doubt challenging task. Recognizing contingent consideration at fair value presents even more valuation challenges. It is an area for which there is limited practical experience and guidance. Specialists performing Purchase Price Allocations should be familiar with these issues.
- WACC / WARA / IRR Testing
The Internal Rate of Return (IRR) is derived by equating the Projected Financial Information (PFI) on a present-value basis to the consideration transferred, assuming the consideration transferred represents fair value. While accounting for Business Combinations, practitioners and preparers must understand the relationship between the IRR and the Weighted Average Cost of Capital (WACC), the existence of synergies, and the basis of the forecast. Understanding the difference between IRR and WACC provides valuable information about the economics of the transaction and the motivation behind the transaction. It often will help distinguish between market participant and entity-specific synergies and determine the amount of synergies reflected in the consideration transferred.
Selecting discount rates on intangible assets that are not within a reasonable range of the WACC and/or IRR is a common issue when measuring the Fair Value of Intangible Assets. Companies should assess the overall reasonableness of the discount rate assigned to each asset by generally reconciling the discount rates assigned to the individual assets, on a fair-value-weighted basis, to the WACC of the acquiree or the IRR of the transaction. This reconciliation is often referred to as a “weighted average return on assets” analysis (WARA). Practitioners and preparers should be able to test the reasonableness of the discount rates applied to the individual assets by calculating WARA.
- Higest and Best Use Assumption
P.J. Patel, CFA, Managing Director ,
Valuation Research Corporation
- Introduction/Overview of the valuations of assets and liabilities for business combinations
- Emerging/evolving valuation issues
- Customer assets
- Deferred revenue
- Continent consideration
- Other current issues
- Re-acquired rights – exclusion to the FV principle
- Remaining useful life
- Auditor/PCAOB scrutiny
Ryan Gandre, Director,
Stout Risius Ross, Inc.
- Impairment Testing
- Impairment testing order (ASC 350 vs. ASC 360)
- Testing at the enterprise value vs. equity level of value
- Consideration of Control Premiums (a/k/a Market Participant Acquisition Premiums)
- Taxable (asset) vs. non-taxable (stock) deal structure considerations
- “Step 0″ impairment testing best practices
Adam Newman, Principal,
GHP Horwath, P.C.
- Auditing Fair Value Measurements
- Relevant Auditing Standards and Guidance (Public vs. Private Companies)
- Practical Guidance for Pleasing the Auditors
- Top Fair Value Auditor Issues Arising from PCAOB Inspections
Who Should Attend:
- CFOs & Finance teams
- Attorneys With Related Practice Areas
- Valuation Practitioners
- Prepares and Users/Analysts
- Finance Directors
- Finance Executives
- Other Interested Professionals
Vinay Torani is a managing director in the Morristown office of financial advisory and investment banking firm Duff & Phelps, where he is part of the Valuation Advisory Services practice. He is also the Morristown office city leader for Duff & Phelps. He has more than 16 years of valuation and mergers and acquisitions (M&A) experience. Vinay has advised clients on M&A, provided fairness opinions and performed valuations of numerous private, publicly traded and early stage companies. He has significant experience in performing valuations of intangible assets for financial reporting and tax planning purposes and assisting clients with goodwill impairment testing.
Vinay Torani is a managing director in the Morristown office of financial advisory and investment banking firm Duff & Phelps, …
Linda MacDonald is a senior managing director in the FTI Consulting Forensic and Litigation Consulting practice and is based in New York. Ms. MacDonald has nearly 25 years of professional experience in financial accounting and reporting. Since joining FTI Consulting in August 2008, Ms. MacDonald has served as a testifying and consulting expert in connection with various litigation matters, many involving the application of generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) by financial institutions, hedge funds, and publicly held entities.
Ms. MacDonald joined FTI Consulting after nearly 12 years at the Financial Accounting Standards Board (FASB), where she was a director. While at the FASB as a director and before that as a project manager, she was involved in establishing U.S. accounting standards and coordinated with the International Accounting Standards Board (IASB) in London on convergence with IFRS. She managed the projects that established the FASB’s accounting standards on fair value measurements (SFAS 157), restructuring obligations (SFAS 146), and asset impairments and disposal activities, including discontinued operations (SFAS 144), and advised on implementation of the standards after they were issued. She also was involved in various initiatives to address complexity in financial reporting, including the FASB’s initiative on principles-based standards.
Ms. MacDonald began her career as an auditor for a national public accounting firm (now Deloitte & Touche). She later joined the U.S. Securities and Exchange Commission (SEC) in Washington, DC, where she was a member of the staff of the Division of Enforcement. While at the SEC, she worked on investigations into possible fraud and violations of GAAP and generally accepted auditing standards (GAAS) associated with the financial statements of public companies. After leaving the SEC, she held positions with national public accounting firms where she worked on various litigation matters.
Ms. MacDonald holds an M.B.A in finance from American University and a B.A. in economics and management from Albion College, and is a certified public accountant. She is a former member of the Technical Standards Subcommittee of the AICPA Ethics Committee and of the AICPA Not-for-Profit Fair Value Task Force. She has been a frequent speaker on accounting topics at national industry and professional conferences and other events.
Ms. MacDonald has contributed to FASB publications, including “Some Facts about Fair Value” (May 2008) and “The IASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP” (1999). Other publications include “Fair Value Changes Ahead,” The CPA Journal (January 2010) and “Don’t Bury Fair-Value Accounting Just Yet,” Conde Nast Portfolio.com (October 7, 2008).
Linda MacDonald is a senior managing director in the FTI Consulting Forensic and Litigation Consulting practice and is based in …
Mr. Hofmann has extensive experience in global corporate finance including corporate securities valuation, mergers, acquisitions, private placements, and venture capital. He’s performed complex financial models for corporate securities valuations and financial structuring involving a broad spectrum of high tech industries and bio-technology.
Mr. Hofmann’s accumulative achievements include one third of all investments of international corporate venture capital fund. He’s prepared over 250 valuation reports for tax, financial reporting, equity financings, mergers, acquisitions, and divestitures. He’s acted as financial advisor in several industry transactions.
Mr. Hofmann holds a
– NACVA: Holder of the Certified Valuation Analyst Designation (CVA)
– CFA Institute: Holder of the Chartered Financial Analyst Designation (CFA)
– Darmstadt University of Technology, Germany: Combined Master’s Degree in Business Administration and Electrical Engineering
– Visiting Scholar at UC Berkeley, CA and Institut Supérieure d’Electronique de Paris, France
Mr. Hofmann’s Professional Board Memberships include
– CFA Institute and CFA-Society San Francisco: Member
– National Association of Certified Valuation Analysts (NACVA): Member (Practitioner) – Appraisal Issue Task Force (AITF): Member
– German American Business Association (GABA): Member of the Board of Directors, Chairman of the Finance Committee, Treasurer
Mr. Hofmann has extensive experience in global corporate finance including corporate securities valuation, mergers, acquisitions, private placements, and venture capital. …
Mr. Patel is a Managing Director with VRC and specializes in the valuation of businesses, assets and liabilities for financial reporting purposes.
Mr. Patel holds the designations of chartered financial analyst (CFA) and accredited senior appraiser (ASA). In addition, he holds a Bachelor of Science degree from the University of Toronto, and a master of business administration degree from Canisius College.
Mr. Patel is a frequent presenter on valuation issues for financial reporting purposes and has recently presented on valuation issues relating to ASC 805, ASC 350/360, ASC 820 and other financial reporting related valuation issues. In addition, Mr. Patel was on the Fair Value Panel at the 2008 AICPA SEC Conference. He has been quoted numerous times in the press regarding valuation issues. Mr. Patel is an active member of the Appraisal Industry Task Force (AITF). He is a member of the Appraisal Foundations Working Group preparing an industry Practice Aid for valuing customer related assets.
Mr. Patel is a Managing Director with VRC and specializes in the valuation of businesses, assets and liabilities for financial …
Ryan Gandre is a Director in the Valuation & Financial Opinions Group at Stout Risius Ross, Inc. (SRR). Mr. Gandre has extensive experience providing a broad range of business valuation and financial advisory services for public and private enterprises. He specializes in the valuation of debt and equity instruments, enterprise valuations, and intangible asset valuations for tax and financial reporting purposes. He is well versed in valuation and accounting guidance related to business combinations, impairment testing, stock-based compensation, and other Fair Value measurements (e.g., mark-to-market valuations of private equity portfolio companies, financial instruments, and derivatives) and has extensive experience with the expectations of tax and financial reporting advisors and regulators.
In addition to his expertise in the areas of tax and financial reporting valuation, Mr. Gandre has advised clients in many other contexts, including corporate strategic planning, financial planning and analysis, estate and gift taxation, shareholder disputes, Subchapter C to Subchapter S conversions, marital dissolution, and other tax, corporate, and litigation matters. In addition, Mr. Gandre has considerable experience providing fairness and solvency opinions for going-private transactions, mergers and acquisitions, significant financing events (e.g., dividend recapitalizations), and other corporate transactions.
Mr. Gandre is a graduate of Miami University and holds the Chartered Financial Analyst (CFA) designation.
Ryan Gandre is a Director in the Valuation & Financial Opinions Group at Stout Risius Ross, Inc. (SRR). Mr. Gandre …
Mr. Newman is a Principal in the Forensic and Litigation Consulting and Valuation and Corporate Finance practices of GHP Horwath, P.C. He has over 19 years of experience providing a variety of financial consulting services, including business valuations, litigation consulting, and tax services. Mr. Newman graduated from the University of Colorado at Boulder in 1993. Mr. Newman, a Certified Public Accountant (CPA) registered in the state of Colorado and Accredited in Business Valuation (ABV), specializes in providing valuation, consulting, and litigation services to businesses and individuals involved in a variety of industries. His practice focuses on the valuation of closely-held businesses for transaction and litigation purposes; calculation of economic damages in commercial litigation and personal injury matters; and strategic consulting.
Mr. Newman is a Principal in the Forensic and Litigation Consulting and Valuation and Corporate Finance practices of GHP Horwath, …
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About Duff & Phelps, LLC
As a leading global financial advisory and investment banking firm, Duff & Phelps leverages analytical skills, market expertise and independence to help clients make sound decisions. The firm advises clients in the areas of valuation, M&A and transactions, restructuring, alternative assets, disputes and taxation – with more than 1,000 employees serving clients from offices in North America, Europe and Asia. For more information, visit www.duffandphelps.com.
Investment banking services in the United States are provided by Duff & Phelps Securities, LLC; Pagemill Partners; and GCP Securities, LLC. Member FINRA/SIPC. Transaction opinions are provided by Duff & Phelps, LLC. M&A advisory and capital raising services in the United Kingdom and Germany are provided by Duff & Phelps Securities Ltd., which is authorized and regulated by the Financial Conduct Authority.
About FTI Consulting
FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. With more than 3,800 employees located in 24 countries, FTI Consulting professionals work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management, strategic communications and restructuring. More information can be found at www.fticonsulting.com.
About The Brenner Group
With 25 years of experience, The Brenner Group is one of the technology community’s leading specialized finance and accounting services firms. Their core offerings include interim financial management, restructuring services, business valuations, and financial advisory. Since 1987 more than 2,000 companies have trusted The Brenner Group with their finance and accounting needs. They’re the leading provider of interim and outsourced financial management for venture capital portfolio companies. The firm has a senior staff of experienced interim CFOs and interim Controllers. Their team can also provide outsourced accounting and finance for the venture capital and private equity firms themselves. The Brenner Group is a premier advisor to financially distressed companies that need restructuring assistance. Their professionals are experts in guiding companies through bankruptcies, liquidations, and wind downs, asset sales of IP or technology assets. The Brenner Group is one of the primary business valuation firms supporting compliance with the IRC 409A, FAS 123R / ASC 718, FAS 141R / ASC 805, and FAS 142 / ASC 350 as well as valuation issues involving litigation and gifts and donations of securities. As well as financial advisory services including financing and merger and acquisition.
About Valuation Research Corporation
Valuation Research Corporation (VRC) is an independent firm that has been providing valuations to the U.S. and international business communities for more than 38 years. VRC’s services include financial opinions with respect to valuation, solvency, capital adequacy and fairness in connection with mergers, acquisitions, divestitures, leveraged buyouts, recapitalizations, financings, and financial and tax reporting matters. VRC’s clients range from Fortune 500 companies to privately-held organizations. Its client base is derived from companies in a broad range of industries. In addition, VRC has long-standing relationships with commercial lenders, investment banking firms, private equity firms, law firms and accounting firms nationwide. VRC has locations in Boston, Chicago, Cincinnati, Milwaukee, New York, Pittsburgh, Princeton, San Francisco, and Tampa; as well as international affiliates in Argentina, Australia, Brazil, Canada, China, France, Germany, Luxembourg, Mexico, Spain, and the United Kingdom
About Stout Risius Ross, Inc.
Stout Risius Ross, Inc. (SRR) is a global financial advisory firm specializing in Investment Banking, Valuation & Financial Opinions, and Dispute Advisory & Forensic Services. SRR serves a range of clients from Fortune 500 corporations to privately held companies in numerous industries around the world – from Argentina to Vietnam. SRR’s clients and their advisors rely on the firm’s premier expertise, deep industry knowledge, and unparalleled responsiveness on complex financial matters. The firm has offices in Atlanta, Chicago, Cleveland, Dallas, Detroit, Houston, Los Angeles, New York, and Washington, D.C. For more information, visit www.SRR.com.
About GHP Horwath, P.C.
As a member firm of Crowe Horwath International, GHP Horwath P.C.’s experienced professionals provide a wide range of services to both private and public companies nationwide and globally, including audit and accounting; personal, corporate, and estate tax planning and compliance; litigation support; business valuation; and personal financial planning, such as investment advising, retirement and estate planning, asset allocation and insurance consulting.
Crowe Horwath’s global network of more than 150 independent accounting and management consulting firms operate from 671 offices around the world. By aligning with Crowe Horwath International, the GHP Horwath staff maintains access to international resources and is able to provide pertinent information to clients who are seeking to expand into new markets or are coping with unfamiliar issues affected by local laws and customs.