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MHM Executive Education Series Webinar: Valuation Issues
 

MHM Executive Education Series Webinar: Valuation Issues

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This course provides an understanding of common financial reporting issues faced by management and its auditors when determining the value or price of an asset or liability (“valuation”). While ...

This course provides an understanding of common financial reporting issues faced by management and its auditors when determining the value or price of an asset or liability (“valuation”). While the issuance of ASC 820, Fair Value Measurements, has provided a common financial reporting framework for determining fair value; its principles-based focus has furthered the need for management, auditors and valuation experts to work closely together on valuation issues and exercises.

The Financial Accounting Standards Board (FASB) has recently issued new guidance related to assessing the impairment of goodwill and infinite lived intangible assets. This guidance has initially been well received by the financial reporting community because under certain conditions it replaces the requirement for a quantitative determination with a qualitative assessment. Many well intentioned accountants concluded the guidance was an approval from the FASB to lessen the amount of work previously required when assessing impairment. Accordingly, upon its issuance, many questions have arisen in the financial reporting community centered on the exact intent of the FASB in issuing the guidance. We believe, as with any qualitative determination, it is likely that the depth and quality of the documentation supporting the assessment will be a significant factor in reaching a supportable conclusion on impairment. This course will explore some of the implementation issues that have arisen related to the new impairment guidance.

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    MHM Executive Education Series Webinar: Valuation Issues MHM Executive Education Series Webinar: Valuation Issues Presentation Transcript

    • MHM Executive Education Series: E ti Ed ti S iValuation Issues in Financial Reporting Presented by: James Comito, Keith Peterka October 18, 2012
    • Agenda• Identifying accounting transactions that commonly result in valuation issues for the accountant and auditor• Managing both the risk associated with valuation issues and the related cost of valuation work• Using the work of a specialist; a review of the relevant auditing standards and practical considerations to improve communication between, management, auditor and valuation experts• An overview of recent changes to the model for assessing impairment for goodwill and infinite lived assets, including: – Step 0 requirements – Review of steps 1 and 2 for the goodwill impairment
    • Overview of Valuation Issues• Valuation Definition – The process of estimating what something is worth. • Financial instruments (assets and liabilities), business ( ), enterprises, intangible assets, and liabilities. • Valuations are needed for a variety of reasons such as investment analysis, tax planning and reporting, risk y , p g p g, management and analysis and financial reporting and analysis. – Virtually all valuation exercises are by their nature extremely y y y subjective.
    • Overview of Valuation Issues• Common Valuation Models – Absolute value models. Such models are based on the present value of an assets expected future cash flows. In practice, absolute value models typically appears in two different forms: multi-period models such as discounted cash flow models or single-period models (e.g., the Gordon model). Absolute value models are reliant on mathematics rather than price observation. – Relative value models. Such models determine value based on the observation of market prices of similar assets. – Option pricing models These models are used for certain types models. of financial assets (e.g., stock warrants, put/call options, stock options issued to employees, financial instruments that contain embedded options. The Black-Scholes-Merton model and lattice Black Scholes Merton models are the best known option pricing models.
    • Overview of Valuation Issues• Over the past few years several factors have contributed to the increased focus on valuation issues faced by the financial reporting community. – The recession and subsequent uncertain economic environment – Increased use of fair value measurements by standard setters – Increased complexity related to business and asset valuation, financial i t fi i l instruments and risk management strategies t d i k t t t i – Increased scrutiny by regulators of fair value measurements – Changes to the fair value financial reporting model • Active versus distressed markets • Use of multiple valuation techniques • Increased disclosure requirements
    • Identifying Valuation Issues• Accounting Transactions that Often Result in Complex Valuation Issues – Business acquisitions – Impairment assessments p – Debt extinguishment – Investments in securities of private entities – Derivative instruments including embedded features instruments, – Equity transactions that involve the securities of private entities – Share-based compensation arrangements
    • Managing Valuation Issues for Success• Cost versus benefit – The goal of management is to achieve compliance with the authoritative guidance while managing the cost of achieving such compliance. – The simple fact is that valuation issues typically result in additional cost. – The amount of additional cost is dependent on many factors, however, a significant factor is the assessment of risk related to the valuation issue. • Many valuation issues stem from significant transactions that are material to the financial statements. However, this is not always the case. • Management and the auditors response to valuation issues should be risk based.
    • Managing Valuation Issues for Success• Management’s decision to use a valuation specialist – If a valuation issue has been identified as high risk the use of a valuation expert will likely be necessary. – Most management teams lack the required expertise to adequately address the authoritative guidance pertaining to valuation issues. – Management may be able to reduce the amount of cost paid to a valuation expert by performing much of the required analysis under the guidance and direction of the valuation expert. – Understanding the documentation needs of the auditor and designing the valuation analysis to address these needs may reduce the amount of effort required by the auditor to obtain comfort on the transaction thereby reducing audit cost.
    • Managing Valuation Issues for Success• The auditors’ decision to use a valuation specialist – Under existing auditing standards, when a valuation issue has been designated as high risk; the audit team will almost always be required to engage a valuation expert to assist the audit team. – Ensuring the expert engaged by management and auditor expert participate in timely discussion of management’s plan to address the valuation issue is essential to an effective and efficient conclusion on the matter. – Waiting until the end of an engagement to address valuation issues almost always results in frustration and costs that might have been avoidable. Early identification and risk assessment related to valuation issues is the key to an effective and efficient conclusion on th matter. l i the tt
    • Using a Valuation Specialist• Considerations for Management – Remember the auditor must assess the management specialist capabilities in relationship to the valuation assignment. Management should as well. – Hiring the right person for the job is critical. – Management must demonstrate the expert is q g p qualified, , competent and objective enough to perform the assignment. – There are many qualified valuation specialists that are narrowly focused on a particular niche market. For example, an expert p p , p that focuses on valuing property in divorce settlements may not be an appropriate choice for an assignment related to valuing intangible assets in a business combination.
    • Using a Valuation Specialist• Considerations for Management – Make sure the specialist is familiar with FASB ASC 820, Fair Value Measurements. Although this standard can no longer be considered “new”, consistent valuation standards have still not been issued. Hence, many valuation specialists never truly adopted the ASC 820 requirements. The use of the term “fair market value” i th i material may i di t an i k t l ” in their t i l indicate issue with ASC ith 820 compliance. – When obtaining valuation assistance for financial reporting purposes ensure th engagement l tt with your valuation the t letter ith l ti specialist acknowledges the appropriate financial reporting framework.
    • Using a Valuation Specialist• Considerations for Management – A primary focus of the valuation specialist is assisting management with the identification of the appropriate valuation technique. – Remember, ASC 820, requires management to at least consider all three acceptable valuation techniques. • Income approach • Market approach • Cost approach – Often management may be comfortable with an income approach (discounted cash flow analysis), however, the market and cost approaches are generally more difficult to navigate navigate.
    • Using a Valuation Specialist• Considerations for Management – Once the valuation technique(s) has been identified the necessary data must be gathered and critical assumptions must be made by management. – The valuation specialist can assist management with its assumptions, however, ultimately it is management that must assume the responsibility for the assumptions and final conclusion. – Watch out for inconsistencies with other company information. • Current company budget projects 5% revenue growth while the valuation exercise uses 7.5%.
    • Using a Valuation Specialist• Considerations for Management – Once the appropriate valuation techniques have been selected by management (with assistance from the expert); management, management’s expert, the auditor and the auditor’s expert should meet to discuss the approach selected by management for the valuation exercise. – There is no more frustrating feeling that completing a valuation exercise only to have an auditor’s expert object to the selected approach. – The assumptions can always be debated; but the basic mechanics of the valuation approach should be agreed to in advance of the data gathering and analysis portion of the exercise. i
    • Some Common Valuation Problems• Business combination example – Company X acquires a small entity for its manufacturing capacity. Management believes the only assets that will be useful are tangible in nature and therefore does not feel the need to engage a valuation expert. – The auditor of Company X is concerned that “other” assets may also be part of the acquisition. • Customer list • Certain contracts • Patents and/or trade names and trade marks • Research projects which qualify as IPRD (in-process research and development) development).
    • Some Common Valuation Problems• Business combination example – The last round of changes to the accounting for business combinations removed the ability for management to rely on its stated “intention” as a basis for assigning value to an asset(s). – The mindset of the “market participant” now governs the assignment of value in a business combination. – These changes combined with earlier efforts by the standard setters to require recording of certain intangible assets that meet the “legal/separation” criteria make it very difficult for management to comply with the authoritative standards without assistance from a valuation specialist.
    • Some Common Valuation Problems• Goodwill impairment example – Company X management performs its annual impairment test related to goodwill by identifying the appropriate reporting units and preparing a discounted cash flow analysis (income approach) to assess whether the goodwill related to each reporting unit is impaired. – The auditor of Company X asks whether the market approach was also considered and if so, how it impacts the final conclusion related to impairment.• Most financial executives are familiar and comfortable with discounted cash flow analysis. However, fair value guidance requires the consideration of all three allowable techniques and the market approach often has broad applicability. Oft f thi reason k t h ft h b d li bilit Often for this a valuation expert is needed by management.
    • Some Common Valuation Problems• Private company securities example – Company X is a private entity that issues share-based compensation to its employees. During the year under audit the company issued one million stock options to members of its board of directors and executive level employees. Company X has never had formal valuation work performed to determine the value of it common stock. Common stock is an i l f its t k C t ki input i t th t into the option pricing model (Black Scholes Merton) used by Company X to determine the value of share-based compensation issued to its employees for financial reporting purposes purposes. – Company X’s auditor is concerned that without independent valuation work related to the price of Company X’s common stock the value assigned to share based compensation may be share-based materially misstated.
    • Some Common Valuation Problems• Private company securities example – Currently, there is not an absolute requirement in either generally accepted accounting principles or generally accepted auditing standards that require independent valuation work. • However, for publicly traded companies the Securities and Exchange Commission has stated its belief that certain transactions such as a significant business combination would be difficult to properly record without appropriate valuation expertise.
    • Some Common Valuation Problems• Private company securities example – Determining the best course of action is often a matter of precision. The higher the risk assigned to the valuation issue the higher the precision that will be needed in determining the value. – For example, instead of one million stock options, assume only 10,000 were issued. It would likely take far less precision for management and its auditor to conclude on the issue. – When management and its auditor conclude that a high degree of precision is necessary because of the risk of material misstatement to the financial statements; the use of a valuation specialist becomes virtually a certainty.
    • Goodwill Impairment Testing• U.S. GAAP Requires* an Impairment Analysis on an Annual basis. Requires – Test to be Performed in the interim if indicators exist. – * Step 0 - Qualitative Assessment Allowed.• Goodwill Impairment Models is a Two Step Analysis – STEP ONE identifies potential impairment by comparing Fair Value of a Reporting Unit to its carrying amount. • Fair Value is to be determined in accordance with ASC 820 • Reporting Units to be determined in accordance with ASC 280Practice Pointers  Fair Value of the Reporting Unit must be from the viewpoint of a Market Participant.  Fair Value is developed using the approach(s) outlined in ASC 820 Reporting 820. Entities must be able to support the approach, and the weighting of the methodologies. A CASHFLOW (Income Approach) is not enough!
    • Goodwill Impairment Testing Step Two of the Goodwill Impairment Model requires the use of a Hypothetical Purchase Price Allocation, which is used to recognize and measure impairment. – Purchase Price Allocation is based off of the Step One Fair Value. Discussion Question If a reporting entity fails Step One (Carry Value of Reporting Units above Fair Value) is it possible not to have a Goodwill Impairment Charge in Step Two, and why?
    • Reporting Units ASC 350 requires goodwill to be assessed for impairment at the reporting unit level, which is defined as an operating segment (before aggregation), or one level below an operating segment (i.e., a component). ASC 350-20-35-34 states, A component of an operating segment is , p p g g a reporting unit if the component constitutes a business for which discrete financial information is available and segment management, regularly reviews the operating results of that component.
    • Segment Reporting – Management Approach To d t T determine operating segments, th fi t step i t id tif the i ti t the first t is to identify th entity’s chief operating decision maker (CODM). The term CODM identifies the decision making role within an organization and not necessarily an individual with a specific title title. ASC 280 defines an operating segment as a component of a business entity that has each of the three following characteristics:1. The component engages in business activities from which it may earn revenues and incur expenses.2.2 The operating results of the component are regularly reviewed by the entity’s CODM to assess the performance of the individual component and make decisions about resources to be allocated to the component.33. Discrete financial information about t e co po e t is a a ab e sc ete a c a o at o the component s available.
    • Identification of Reporting Units Practical Considerations Identification of reporting units is not a standard procedure for private companies, and must be well documented.  D Documentation i part of management’s responsibilities. i is f ’ ibili i Number of reporting can change with changes in management and operations. No “industry standard” for determining reporting units for an industry. ASC 280 Introduces the concept of the “Chief Operating Decision Maker” (CODM), critical to understand how the entity fills this role. Need to have sufficient audit support.  Key question “What does the Board/CEO use to make resourcing decisions?
    • Reporting Units Allocation• Basis for allocating assets and liabilities to various reporting units must have a supportable basis.• Challenges with Intangible Assets such as patents and trademarks. – M require th use of valuation specialist. May i the f l ti i li t – For example the allocation of a Trademark  Apply royalty rate to each reporting unit – A Assumes no ownership of th t d hi f the trademark, but rather would need t k b t th ld d to lease it (Relief from Royalty).  One reporting unit assume ownership and the other reporting units rents the trademark.  Other Approaches – Assign carrying value based on benefits received (Revenue or EBIT) – Assign carrying value based on relative fair values of reporting units
    • Shared Asset - Trademark Recap of Possible Ways to allocate a Trademark – If reporting unit pays a royalty, it does not assume ownership, ownership thus no carrying value assigned – If reporting unit receives royalty, it assumes ownership and carrying value is assigned p y g g – If reporting units are assigned carrying value, then ownership is assumed, thus no need for royalty payments in cash outflows
    • Assigning Goodwill to a Reporting Unit How Should Goodwill be assigned to Multiple Reporting Units? Assign upon acquisition based on expected benefits Goodwill can be assigned to reporting unit even thought assets or liabilities are not assigned Methodology must be reasonable and supportable and applied in a consistent manner
    • Reason for Changing the Goodwill StandardStep Zero p• Addresses private companies’ concerns about the cost and complexity of the goodwill impairment test.• Simplifies how entities, both public and nonpublic, test goodwill for impairment.• Improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual i l impairment t t i d t i t tests in determining whether it i more lik l th i i h th is likely than not that the fair value of a reporting unit is less than its carrying amount.• FASB may readdress goodwill accounting in the future.
    • Reason for Changing the Goodwill StandardStep Zero p• The revised standard allows an entity first to perform a qualitatively assessment whether it is necessary to perform step one of the two- step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting units fair value is less than its carrying amount.• Provides examples of events and circumstances that an entity should consider when performing the qualitative assessment.• An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. , p g
    • Reason for Changing the Goodwill StandardStep Zero p• The revised standard removes the guidance that allows an entity to carry forward the fair value of a reporting unit under certain conditions. – The revised standard requires an entity to consider, as part of its qualitative assessment, the difference between the fair value and the carrying amount of a reporting unit if the entity has a recent fair value calculation. – The existence of a recent fair value calculation, and the extent of any "cushion" between a reporting units fair value and its carrying amount, will be an important factor when determining whether to perform the qualitative assessment. The qualitative assessment may be more cost effective when a reporting units fair value substantially exceeded its carrying amount in a prior period and no significant adverse changes have since occurred.
    • Reason for Changing the Goodwill StandardStep Zero p – The FASB noted in its basis for conclusions, the more time that has elapsed since a recent fair value calculation, the more difficult it may be to support a conclusion based solely on a qualitative assessment. The frequency with which an entity refreshes its fair value calculation for a reporting unit will also depend on a variety of factors, including how much "cushion" existed at the last fair value calculation and the significance of any adverse changes since that date date.
    • Events and Circumstances Description Examples Macroeconomics General economic conditions, limitations on access to capital, general debt and equity market conditions, FX issues Industry & market conditions Entity E tit environment, changes i multiples and metrics, i t h in lti l d ti product/service demand issues, regulatory or political developments Cost/expense factors Materials, labor and other factors impacting earnings Financial performance Cash flow trends, variance analysis over relevant periods Company-specific events Changes in management, key personnel, strategy, loss of customers, pending bankruptcy of litigation Reporting-unit specific events Change in composition or carrying values of assets, asset group or subsidiary changes, disposal of a portion of a reporting unit Capital C it l market pricing k t i i Sustained decrease i share price (b th i absolute and S t i dd in h i (both in b l t d relative to peers)
    • Events and Circumstances• During the assessment, an entity should consider each adverse factor as well as the existence of any positive and mitigating events and an entity should place more weight on those events and circumstances that most significantly affect a reporting units fair l f i value or carrying amount. i t• Understand which factors are the key drivers of each reporting units fair value and monitor changes in those factors.• Identify both the internal and external sources for information y needed to monitor the relevant factors for each reporting unit.
    • Amendment of ASC 350• In September 2011, FASB issued Accounting Standards Update No. 2011-08 (ASU 2011-08), an amendment of ASC 350. FASB’s intention in issuing ASC 2011-08 was to simplify how public and nonpublic entities test goodwill for impairment The qualitative impairment. assessment permitted under ASU 2011-08 is commonly being referred to as “Step Zero” by many practitioners.• The amendment will be effective for annual and interim goodwillg impairment tests performed for fiscal years beginning after December 15, 2011.• Amends the examples of events and circumstances that an entity should consider b t h ld id between annual i l impairment t t i d t i t tests in determining i i whether it is more likely than not (that is, a likelihood of more than 50 percent), that the fair value of a reporting unit is less than its carrying amount y g
    • Amendment of ASC 350• An entity ma resume performing the qualitative assessment in an entit may res me q alitati e any subsequent period. – Not an Accounting Policy election.• Allows companies an “unconditional option” to skip the optional unconditional option qualitative assessment and continue applying the existing two-step test• Requires no new disclosures q – 2011 AICPA PCAOB and SEC Conference, SEC Staff noted that it would expect that when the qualitative assessment is used it is disclosed. – Best Practice for all reporting entities entities.
    • Goodwill Impairment Assessment Decision Tree Is I it more Qualitative No Stop likelyAssessment than not FV < CV No No Yes Is Is the FV of RU Yes implied Step 1 Step 2 FV of < CV of GW < CV RU of GW Yes FV = Fair Value Recognize CV = Carrying Value Goodwill GW = Goodwill Impairment RU = Reporting Unit
    • Implementation Guidance For Performing Step Zero1. Determine/identify key assessment factors for each reporting unit ― While the process is deemed qualitative, many of the assessment factors are quantitative ― Remember that factors other than those listed in the ASU may be relevant y ― Consider factors used in a typical fair value determination as well2. Develop and collect key market-based metrics – Capital market pricing for comparable companies (relative pricing) and equity market capitalization, if public ( b l t pricing) k t it li ti bli (absolute i i ) – Changes in valuation metric(s) over measurement period3. Establish process to measure, compare and identify changes in key factors in subsequent p q periods ― Actual vs. budgeted results ― Changes in key performance metrics ― Changes in external environment – economy and industry
    • Implementation Guidance For Performing Step Zero4. Compile and document the positive, negative and mitigating events and factors in subsequent periods ― Prepare a presentation or matrix of factors considered, their effects on the assessment and their relative weights.5. Documentation of the process and the presentation of the results will be key components of a success Qualitative Assessment. A t
    • Goodwill Impairment Testing ASC 350 Pursuant to accounting rules under ASC Subtopic 350-20-35-1, 350 20 35 1, goodwill and certain intangibles are not amortized; rather, these assets must be periodically tested for impairment Two Step Goodwill Impairment Test1. Step One impairment test compares the fair value of a reporting unit to its carrying value If the fair value exceeds carrying value there is value. no goodwill impairment and the test is complete. If not, impairment is indicated, requiring a Step Two impairment test.2 Step Two which is similar to an allocation of purchase price2. Two, performed pursuant to ASC 805, calls for comparing the fair values of a reporting unit’s assets to their carrying values and quantifies the amount of goodwill impairment. g p
    • STEP ONE PRACTICE ISSUES Determining the Fair Value of a Reporting Unit Two generally accepted premises for determining the Fair Value:1. Equity value (generally the market capitalization of the company), also referred t as " ) l f d to "market value" or "offer value", k t l " " ff l "2. Enterprise value (generally the fair value of the equity and the debt), also referred to as "firm value" or "transaction value", is most simply defined as equity value plus net debt Net debt debt. equals debt & equivalents minus cash & equivalents Example - A business is formed by investing $100K cash, and borrows an additional $200K, the "equity value" for the business would be $100K, t the t b $100K yet th enterprise value would b $300K ($100K i equity i l ld be in it value plus $200K of debt.) As shown by this example, equity value represents the value to the contributors of equity into the business, whereas enterprise value represents the value for all contributors of capital (i thi case, th owner of th b i it l (in this the f the business as well as th d bt ll the debt holder)
    • STEP ONE PRACTICE ISSUES Reporting Units with Negative Equity p g g q y The EITF resulted from questions pertaining to whether a reporting unit’s carrying amount should be based on an enterprise value (EV) premise or an equity level value premise. Although thi is a significant i Alth h this i i ifi t issue on it own, especially i its i ll in situations where the fair value of debt differs from its book value, this issue was further magnified by situations where the carrying value of equity was zero or negative. In these instances, the method for calculating the carrying value would result in different conclusions in a step 1 test; either goodwill impairment is indicated and step 2 is needed or no goodwill impairment is indicated. indicated Perform qualitative assessment If it is more likely than not that impairment is present, proceed to Step 2 42
    • Determining Step One Fair Value Best Fair Value Evidence? Quoted Prices in Active Markets (Level 1 Measurement) however…  It is Rare that a Reporting Unit will have an active market  Private Company’s do not have active markets Since Private Company’s and Reporting Units do not have Active Markets (Level One Measurement) Reporting Entities will need to incorporate market participant assumptions with valuation models.
    • Market Participant Considerations What assumptions would be used in pricing the assets of the reporting unit? - Strategic Buyer or Financial Buyer? Would market participants use the reporting units net assets the same manner? – Standalone value to reporting units? – Exploit synergies among reporting units? Taxable or Nontaxable Basis?
    • Valuation ApproachesThree Allowable Approaches: – Income approach, Market approach & Cost Approach • Cost Approach used more to value individual assets, not commonly used t value reporting units. d to l ti itCommon Methods Used to Value a Reporting Unit • Discounted cash flow (DCF) method (Income approach) • Guideline public company (GPC) method (Market Approach) • Guideline transaction (GT) method (Market Approach) • Market capitalization method (Market Approach)
    • Discounted Cash Flows Method Keys of the DCF ModelProspective financial information (PFI) • THIS IS THE STARTING POINT • Discrete period cash flow – May need adjustment to be “Market Participant” • T Terminal cash fl i l h flows – Valuation ConceptLong-term growth rate and Discount rate used will have a major impact on the DCF. Practice Pointer – Using a “Conservative "Discount rate does not cure g poorly prepared and supportable cash flows.
    • Key Information Need for the DCF Analysis PFI development – Strategic plans – Budgets g – Prior forecasts – Benchmarking studies – Board or banker presentations p – Analyst coverage Practice Pointer – PFI information will start out very much entity focused, it will y y , require adjustments to become market participant data assumptions
    • Key Information Need for the DCF Analysis PFI development - How long? – Comfortable making estimates – Stabilized or Constant • Growth • Reinvestment in business • R t of return Rate f t – On new invested capital – On base invested capitalPractice PointerP ti P i t Cash flow analysis typically is for 4-5 years, but there is not set standard.
    • Key Information Need for the DCF Analysis PFI development Common Fair Value Adjustments • Planned acquisition activity • Working capital • Deferred revenue • Non-operating assets and liabilities • Legal f L l form of reporting unit f ti it • Depreciation and amortization • Share based compensation • Fixed and variable costs • Income tax rate • Related party transactions • Interest bearing operating debt
    • DCF – Long Term Growth Rate Long-term growth rate – Critical Component – The long-term growth rate indicates the growth the business will h ld i t perpetuity b i ill hold into t it – For a business that is a going concern, this rate is typically between 2% and 5% – Assessing Terminal Growth Rate • Management expectations • Industry long-term growth prospects • Inflation prospects • Has business stabilized?
    • Key Information Need for the DCF Analysis PFI development – key takeaways – Can enlist help to develop PFI – Ultimately management responsibility – Goal is to end up with market participant cash flows
    • Market Approach Guideline Public CompanyMethod (GPCM) Uses information of publically traded comparable companies Usually thought to begin at a minority value • M b subject t a control premium May be bj t to t l i
    • Guideline Public Company Method General Steps to Using GPCM – Select guideline companies – Determine most relevant value multiples – Calculate market multiples for guideline companies – Evaluate whether adjustments to financial metrics are necessary to i t arrive at normalized metrics ( t li d t i (market assumptions) k t ti ) – Apply selected multiples to subject company financial metrics – Apply control premium, if applicable
    • Guideline Public Company Method Select guideline companies • Comparability factors • Similar operational characteristics – Same industry (SIC) – Lines of business – Geography – Customers or distribution channels – Business cycle – Stage in business life cycle Practice Pointer – These factors need to be well documented.
    • Guideline Public Company Method Select guideline companies – Comparability factors – Similar financial characteristics • Size • Performance or profitability • Future growth • Asset base • Own vs. leased property • Amortization and depreciation policies • Inventory policies
    • Guideline Public Company Method Determine most relevant value multiples – Numerator • BEV or • Equity – Denominator: • Revenue • EBITDA • EBIT • Net income • Total assets • Book equity – Denominator timeframe: • Last twelve months (LTM) • Last fiscal (LFY) • Last 3 year average – Non-financial metrics
    • Guideline Public Company Method Calculate market multiples for guideline companies – Analysts can do this on their own. – Database services make these calculations usually for a fee fee. – These can be adjusted to enhance comparability. Evaluate whether adjustments to financial metrics are necessary – Objective is to reflect normalized operations • Remove non-operating activity p g y • Remove atypical activity • Address intercompany arrangements in effect • Address intercompany arrangements not reflected
    • Guideline Public Company Method Apply selected multiples to subject company financial metrics – When more than one multiple is selected, a weighting effort is needed • Should reflect relative importance • Ranges can be narrow or wide • Selection should demonstrate careful consideration – A straight average is not necessarily the best
    • Goodwill Impairment Testing Step Two of the Goodwill Impairment Model requires the use of a Hypothetical Purchase Price Allocation, which is used to recognize and measure impairment. – Purchase Price Allocation is based off of the Step One Fair Value. Discussion Question If a reporting entity fails Step One (Carry Value of Reporting Units above Fair Value) is it possible not to have a Goodwill Impairment Charge in Step Two, and why?
    • Goodwill Impairment Testing Discussion Question Yes. The Goodwill Impairment Test is the last impairment analysis to be completed by a reporting entity. Meaning current assets (Inventory) Long Lived Assets, and Other Indefinite Lived Intangibles Must be tested prior to Goodwill. • This is critical so that the correct carrying value of the Reporting Unit is used in the Goodwill Analysis. Analysis The reason no Goodwill Impairment could result when performing Step Two of the analysis is due to the different basis of which the impairment models are performed. This could happen when a Company has a significant amount of Fixed Assets (Long Lived Assets) who’s Fair Value is lower than their Carrying Amount. It is possible since the Long Lived Asset model is based on an UNDISCOUNTED cash flow analysis.
    • ASU 2012-021 The FASB issued final guidance adding an optional qualitative assessment for determining whether an indefinite-lived intangible asset is impaired. The guidance in the ASU gives companies the option t fi t perform a qualitative assessment to determine whether ti to first f lit ti tt d t i h th it is more likely than not (a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired. The ASU gives companies the option to consider relevant events and circumstances that may affect the fair value of an indefinite-lived intangible asset. Companies will need t consider whether and, if i t ibl t C i ill d to id h th d so, how much those events and circumstances could have affected the significant inputs they use to determine the fair value of the assets
    • ASU 2012-021 Effective date - The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after 15 September 2012. Early adoption is permitted, even by companies whose impairment testing dates have passed if they have not yet issued their most recent financial statements or made them available for issuance.
    • Speaker Biography James Comito CPA Comito, Shareholder Mayer Hoffman McCann P.C. 858.795.2029 jcomito@cbiz.comA member of the MHM Professional Standards Group, James has an expertise in allaspects of revenue recognition, business combinations, impairment of goodwill andother intangible assets, accounting for stock-based compensation, accounting for equityand d bt instruments and other accounting i d debt i t t d th ti issues.Additionally, he has significant experience with a variety of other regulatory andcorporate g p governance issues p pertaining to p g publicly traded companies, including all y p gaspects of internal control. In addition, James frequently speaks on accounting andauditing matters at various events for MHM.
    • Speaker Biography Keith Peterka, CPA Peterka Shareholder Mayer Hoffman McCann P.C. 610.862.2744 kpeterka@cbiz.comWith more than 19 years of experience in public accounting, Keith performs national firmresponsibilities for IFRS, fair value accounting and auditing, revenue recognition andbusiness combinations. He has also developed national training programs for accountingpronouncements and complex accounting t i t d l ti topics.Keith is a subject matter expert for IFRS, SEC reporting and fair value accounting inMHM’s Professional Standards Group. He also is a member on the IFRS Foundations pSmall & Medium-sized Entities (SMEs) Implementation Group.
    • Questions?