Business Valuation for Financial Statement Reporting

A Global Reach with a Local Perspective University of North Alabama 19th Annual Decosimo Accounting Forum July 22, 2011 www.decosimo.comBusiness Valuation for FinancialStatement ReportingBRENT MCDADE, ASA, CBA•BVALManaging Director

DECOSIMO ADVISORY SERVICES Business valuation Litigation support Transaction advisory

DECOSIMO CORPORATE FINANCE Member FINRA / SIPC Formalization of services firm already providing  Over 100 soft drink bottling transactions  5 Major League Baseball transactions  Lots of capital raising

WHAT WE WILL COVER TODAY What is value? Approaches to value Levels of value Business valuation and financial reporting  Common occasions  Level of value  Peculiarities

WHAT IS VALUE?

A FUNNY THING HAPPENED ON MY WAYTO A NOBEL PRIZE

THE THREE APOSTLES Income Market Asset

THE INCOME APPROACH “Prediction is difficult, especially about the future.” --Niels Bohr

THE MARKET APPROACH Compare to comparable investments  Price to Earnings Ratio  Total Capital to Revenue Ratio  Total Capital to EBITDA  Etc. Rely (theoretically) on the valuation arithmetic performed by others

THE MARKET APPROACH“But do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…” - Allan Greenspan

THE ASSET APPROACH Also known as the cost approach How much is our stuff worth? How much do we owe our creditors? The difference is the value of our equity. Problem: How do we value certain types of stuff?

THE ASSET APPROACH“I cannot change the fact that my paintings do not sell. Butthe time will come when people will recognize that they areworth more than the value of the paints used in the picture.” -- Vincent Van Gogh

LEVELS OF VALUE

BV and FSR Purchase Price Allocation Goodwill Impairment Testing Tax – 409A Securities Issued as Compensation (718)

PURCHASE PRICE ALLOCATION ASC 820 Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation date BEV Market participant assumptions regarding cash flows Market participant assumptions regarding risk Controlling interest level of value

LEVELS OF VALUE

GOODWILL IMPAIRMENT TESTING ASC 350-20 BEV Market participant assumptions regarding cash flows Market participant assumptions regarding risk Controlling interest level of value

LEVELS OF VALUE

409A IRC Value of the minority interest May not = pro rata value of the enterprise Cash flows to the minority interest holder Risks of the minority interest Nonmarketable minority interest basis

LEVELS OF VALUE

718 SECURITIES ISSUES ASCOMPENSATION 505 Securities issued to vendors generally the same Fair value: The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale Value of the minority interest May not = pro rata value of enterprise Cash flows to the minority interest Risks of the minority interest Nonmarketable minority interest basis

LEVELS OF VALUE

LEVELS OF VALUE SUMMARY Purchase Price Allocation – Control Impairment Test – Control 409A – Nonmarketable Minority 718 and 505 – Minority  Primary investors – securities generally considered marketable (Practice Aid)  Other investors – depends on attributes of securities  Rules can be confusing

PECULIARITIES Valuation for one of these purposes may not be entirely appropriate for another The preference for a customer related intangible Unexpected magnitude of goodwill impairment

CONNECT WITH ME Brent McDade, ASA, CBA•BVAL Managing Director 423.266.5212 brentmcdade@decosimo.com On LinkedIn: www.linkedin.com/in/brentmcdade Disclaimer: The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals or specific situations.

Business Valuation for Financial Statement Reporting

by DecosimoCPAs on Aug 24, 2011

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