Your SlideShare is downloading. ×
0
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Sfas142 144 Presentation(02 23 09)
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Sfas142 144 Presentation(02 23 09)

663

Published on

Impairment Testing in the Current Environment

Impairment Testing in the Current Environment

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
663
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Long Live the Asset!Long Live the Asset! Impairment Testing in the Current Environment February 24, 2009
  • 2. Valuation Research Corporation • Formed in 1975, VRC has eight U.S. offices and eight international affiliates. • VRC provides M & A advisory services, fairness and solvency opinions in support of corporate transactions, and valuations of intellectual property and tangible assets for financial reporting and tax purposesand tangible assets for financial reporting and tax purposes. • VRC maintains relationships with corporations, lenders, accountants, investment banks, private equity firms, and law firms. • VRC was instrumental in forming the Appraisal Issues Task Force (AITF), a valuation industry group that meets quarterly to discuss financial reporting related valuation issues.related valuation issues. 2Valuation Research CorporationValuation Research Corporation
  • 3. P.J. Patel, CFA • Mr. Patel specializes in the valuation of businesses, assets and liabilities for financial reporting purposes. In particular, he has focused on the valuation of intellectual property/intangible assets such as trademarks, technology, software, customer relationships and IPR&D. He also values business interests for tax purposes. • Mr. Patel is an active member of the AITF and is currently a member of the Appraisal Foundation Working Group preparing a Practice Aid for the valuation of customer relationships. • Mr. Patel is a frequent presenter on valuation issues for financial reporting purposes and has recently presented on valuation issues relating to SFAS No. 141/141R, SFAS No. 142/144, SFAS No. 157relating to SFAS No. 141/141R, SFAS No. 142/144, SFAS No. 157 and other emerging issues. Mr. Patel recently spoke at the AICPA SEC conference in Washington D.C. 3Valuation Research CorporationValuation Research Corporation
  • 4. Edward Hamilton • Mr. Hamilton specializes in the valuation of businesses, assets and liabilities for financial reporting purposes. In particular, he has focused on the valuation of intellectual property/intangible assets such as trademarks, technology, software, customer relationships and IPR&D. He also values business interests for tax purposes. • Mr. Hamilton is an active member of the AITF and is currently involved with the Appraisal Foundation Working Group preparing a Practice Aid for the valuation of customer relationships. • Mr. Hamilton is a frequent presenter on valuation issues for financial reporting purposes and has recently presented on valuation issues relating to SFAS No. 141/141R, SFAS No. 142/144, SFAS No. 157to SFAS No. 141/141R, SFAS No. 142/144, SFAS No. 157 and other emerging issues. 4Valuation Research CorporationValuation Research Corporation
  • 5. Agenda – Issues in Accounting For Asset Impairment • Guidance • SFAS 142: Goodwill and Other Intangible Assets • Goodwill Testing Consists of Two Stepsg p • Comparison of the Fair Value of the Reporting Unit to its Carrying Value • Recognition of an Impairment Amount • SFAS 144: Accounting for the Impairment of Long-Lived Assets • Timing/Triggering Events • Determining Asset Groups • Determining the Primary Asset T ti f R bilit• Testing for Recoverability • Allocating Impairment • Impairment Testing Order C l i P tti It All T th• Conclusion: Putting It All Together 5Valuation Research CorporationValuation Research Corporation
  • 6. Sources of Information Statement/EITF Issue SFAS 142 The testing and impairment of goodwill and indefinite- lived intangibles SFAS 144 The testing and impairment of long-lived tangible and i t ibl tintangible assets SFAS 157 Guidance on fair value measurements EITF 02 7 Unit of accounting for the impairment testing ofEITF 02-7 Unit of accounting for the impairment testing of indefinite-lived intangible assets EITF 02-13 Treatment of deferred income taxes in goodwill impairment testingimpairment testing 2008 SEC Speeches Inclusion of a control premium Market cap reconciliation Interim impairment testing indicators 6Valuation Research Corporation
  • 7. Summary of Impairment Testing Accounting Guidance SFAS 142 SFAS 144 A t T G d ill I d fi it Li d L Li dAsset Type Goodwill Indefinite-Lived Intangible Assets Long-Lived Tangible & Intangible Assets Focus Goodwill carried at lower of FV or CV Indefinite-lived intangible assets carried at lower of FV or CV Test the recoverability of long-lived assets & allocateFV or CV & allocate impairment Methodology Two step One step Multiple steps Frequency Annually/event Annually/event Event basedFrequency Annually/event based Annually/event based Event based 7Valuation Research CorporationValuation Research Corporation
  • 8. Impairment Testing • Goodwill under SFAS 142 f S S• Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 8Valuation Research Corporation
  • 9. Goodwill Impairment Testing - Issues • When to Test? • Testing Methodology• Testing Methodology • Current Issues 9Valuation Research Corporation
  • 10. When to Test for Goodwill Impairment? • Paragraph 26 states that goodwill should be tested for impairment annually or more frequently • Paragraph 28 notes several events/circumstances causing goodwill to beg p g g tested between annual test dates: a) Significant adverse change in legal factors or in the business climate. b) An adverse action or assessment by a regulatorb) An adverse action or assessment by a regulator c) Unanticipated competition d) A loss of key personnel e) A more-likely-than-not expectation that a reporting unit or a significant portion of) y g g a reporting unit will be sold or otherwise disposed of f) The testing for recoverability under Statement 144 a significant asset group within a reporting unit g) Recognition of a goodwill impairment loss in the financial statements of ag) Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. 10Valuation Research Corporation
  • 11. When to Test for Goodwill Impairment? Issues: • Can I carry forward the reporting unit’s fair value per Paragraph 27? • What if the market capitalization drops below the book value of equity?p p q y • What if the book value of equity is negative? 11Valuation Research Corporation
  • 12. Step 1: Does Goodwill Impairment Exist? • Paragraph 19 of SFAS 142 outlines step 1 of goodwill impairment testing St 1 i d t id tif t ti l i i t• Step 1, is used to identify potential impairment • If the fair value is greater than the carrying value, the reporting unit is not impaired • If the fair value is less than the carrying value, proceed to step 2 to determine the level of impairment loss, if any 12Valuation Research Corporation
  • 13. Step 1: Does Goodwill Impairment Exist? Issues: • What is the appropriate level to calculate the fair value of the reporting unit? Enterprise Value, Total Assets, Equity?p , , q y • Reconciling to the market cap? • Estimation of a control premium? Mergerstat studies generally point to control premiums ranging between 20-30%. However, the range of control premiums is significant. • SEC – No bright lines. Do a supportable valuation with sufficient analysis to support position, especially if control premiums are significant. N ifi d t f d t t d t i t l i• No specific date or range of dates to determine control premium. • If using an income approach, has the discount rate changed due to increased risk and/or an increased cost of debt? Increased scrutiny should be applied when determining the WACC using market participant inputswhen determining the WACC using market participant inputs 13Valuation Research Corporation
  • 14. Step 1: Reconciling to the Market Cap Your company has two reporting units that get tested annually for goodwill impairment as of 9/30. Recently, your market capitalization has dropped below your book value of equity. In light of this and current economic conditions you complete an interim test for goodwill impairment as of 12/31/08. Reporting Unit 1 (RU1) has ag p p g ( ) carrying value of $350 while Reporting Unit 2 (RU2) has a carrying value of $400. The market capitalization of the company is $700 and there is no debt. The table below summarizes the value conclusions. Reporting Unit Fair Value Carrying Value Conclusion RU1 $500 $350 No impairment RU2 $300 $400 Impairment indicatedRU2 $300 $400 Impairment indicated, proceed to step 2 Total $800 $750 Market Cap $700Market Cap $700 Implied Control Premium 14.3% 14Valuation Research Corporation
  • 15. Step 2: Determine Implied Fair Value of Goodwill • Paragraphs 20 & 21 of SFAS 142 outline step 2 methodology • Steps • SFAS 141 purchase price allocation • Fair value of reporting unit equivalent to purchase price in a 141 • Allocate to fair value of all assets/liabilities (even if the assets/liabilities are not on the books of the reporting unit) • The allocation process is performed only for the purpose of testing goodwill forThe allocation process is performed only for the purpose of testing goodwill for impairment; an entity should not write up or write down a recognized asset or liability, nor should it recognize a previously unrecognized intangible asset as a result of that allocation process. • The fair value of the goodwill is equal to the residualg q • The level of goodwill impairment is equal to the difference between the fair value of goodwill and the book value of goodwill. • After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis Subsequent reversal of aof goodwill shall be its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed. 15Valuation Research Corporation
  • 16. Step 2: Determining the Level of Goodwill Impairment • Reporting Unit 2 failed step 1 test • Fair value = $300 • Carrying value = $400 A f thi l th t b k l f PP&E d i t ibl t• Assume for this example that book value of PP&E and intangible assets are a reasonable of estimate fair value. Reporting Unit 2 Book Value Fair Value Impairment Net Assets $400 $300 Working Capital 70 70 PP&E 50 50 Intangibles 120 130 Goodwill 160 50 110Goodwill 160 50 110 16Valuation Research Corporation
  • 17. Impairment Testing • Goodwill under SFAS 142 • Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 17Valuation Research Corporation
  • 18. Intangible Assets Not Subject to Amortization • Guidance is in SFAS 142, paragraph 17 • Testing is annual with event based testingTesting is annual with event based testing • Largely consists of trademarks/brands, certain licenses • Test compares fair value to carrying value If f i l i l th th i l th diff i th• If fair value is less than the carrying value, the difference is the impairment amount • Subsequent reversal is prohibited 18Valuation Research Corporation
  • 19. When to Test Indefinite-Lived Intangibles • Indefinite-lived intangibles are tested for impairment annually or due to an event consistent with paragraph of SFAS 144. • The following are examples of such events or changes in circumstances:The following are examples of such events or changes in circumstances: a. A significant decrease in the market price of a long-lived asset (asset group) b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expectedg y g y p for the acquisition or construction of a long-lived asset (asset group) e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)losses associated with the use of a long lived asset (asset group) f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. 19Valuation Research Corporation
  • 20. When to Test Indefinite-Lived Intangibles Issues: • Can I carry forward the fair value from one year to the next ? • What if I plan on phasing out the trademark?What if I plan on phasing out the trademark? 20Valuation Research Corporation
  • 21. Indefinite-Lived Intangibles: Impairment Testing Your company has 2 indefinite-lived trademarks that get tested annually for goodwill impairment as of 9/30. Recently, your market capitalization has dropped below your book value of equity. In light of this and current economic conditions you complete an interim test for impairment as of 12/31/08 Trademark 1 has a carrying value of $35interim test for impairment as of 12/31/08. Trademark 1 has a carrying value of $35 while Trademark 2 has a carrying value of $45. The table below summarizes the value conclusions. Fair Value Carrying Value Difference Conclusion Trademark 1 $40 $35 $5 No impairment Trademark 2 $40 $45 ($5) Impairment, write down asset b $5asset by $5 21Valuation Research Corporation
  • 22. Impairment Testing • Goodwill under SFAS 142 • Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 22Valuation Research Corporation
  • 23. When to Test Long-Lived Assets for Impairment • A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: a. A significant decrease in the market price of a long-lived asset (asset group) b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the l f l li d t ( t ) i l di d ti t bvalue of a long-lived asset (asset group), including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group) e A current period operating or cash flow loss combined with a history of operating or cash flowe. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.p g y p y 23Valuation Research Corporation
  • 24. Long-Lived Asset Impairment – Asset Grouping • Assets are grouped at the lowest level for which identifiable cash flows are largely independent. • Likely consists of working capital fixed assets intangible assetsLikely consists of working capital, fixed assets, intangible assets • Asset group does not include goodwill unless the asset group is also a reporting unit. Company Reporting Unit 1 Asset Reporting Unit 2 Asset Asset Asset • Issue: How to determine asset groups? Asset Group Asset Group 1 Asset Group 2 Asset Group 3 24Valuation Research Corporation
  • 25. Step 1: Recoverability Test Step 1: Test for recoverability • The carrying value of the asset group is compared to the sum of undiscounted cash flows. • Cash flows are projected over the remaining useful life (depreciable or amortizable life) of the primary asset of the asset group. • “Only the future cash flows… that are directly associated with and that t d t i di t lt f th d t lare expected to arise as a direct result of the use and eventual disposition of the asset (asset group). “ • Excludes interest and, per recent guidance from several leading firms, taxes.taxes. • Entity uses its own assumptions of asset use and should consider all available information. IIssues: • If I am using an asset at less than its full potential does that mean its impaired? Is there a limitation on the life for purposes of determining the fair value of• Is there a limitation on the life for purposes of determining the fair value of the asset group? 25Valuation Research Corporation
  • 26. Step 1: Recoverability Test Your company has 3 asset groups within reporting unit 2. In light of current economic conditions you test your asset groups for impairment as of 12/31/08. The table below summarizes the value conclusions. Reporting Unit Undiscounted Cash flow Carrying Value Conclusion Asset Group 1 $60 $50 No impairment Asset Group 2 $70 $130 Impairment indicated, proceed to fair value testp Asset Group 3 $30 $60 Impairment indicated, proceed to fair value test Total $160 $240Total $160 $240 Goodwill $160 Unallocated as the asset groups are components of the reporting unit 26Valuation Research Corporation p g
  • 27. Step 2: Determine Fair Value and Allocate Impairment • The asset group is impaired by the amount its carrying value exceeds its fair valueexceeds its fair value. • The impairment is allocated, on a pro-rata basis to the assets group’s long-lived assets. • An asset cannot be impaired lower than its fair value• An asset cannot be impaired lower than its fair value. 27Valuation Research Corporation
  • 28. Step 1b: Fair Value Test The next step is to calculate the fair value of the asset groups that failed the undiscounted cash flow test. Reporting Unit Undisc Fair Value Carrying ConclusionReporting Unit Undisc. Cash flow Fair Value Carrying Value Conclusion Asset Group 1 $60 $100 $50 No Impairment Asset Group 2 $70 $150 $130 No Impairment Asset Group 3 $30 $50 $60 Impairment indicated, proceed to step 2proceed to step 2 Total $160 $300 $190 Goodwill $160 Unallocated as the asset groups are components ofg oups a e co po e s o the Reporting Unit 28Valuation Research Corporation
  • 29. Step 2: Determine the Level of Asset Impairment The next step is to calculate the fair value of the asset groups that failed the undiscounted cash flow test. Asset Group 3 is showing impairment of $10. Asset Group 3 Book Value % of Total Fair Value Pro –Rata Allocation Allocation of impairment Adjusted Book Value Working Capital $10 n/a 0 0 $10 Fixed Assets 20 40% 18 4 2 18 Customer relationships 10 20% 12 2 0 10 Technology 20 40% 7 4 8 12 Total 60 10 10 50 29Valuation Research Corporation
  • 30. Priority 144.13. Other than goodwill, the carrying amounts of any assets (such as accounts receivable and inventory) and liabilities (such as accounts payable, long term debt, and asset retirement obligations) not covered by this Statement that are included in an asset group shall be adjusted in accordance with other applicable generallyg p j pp g y accepted accounting principles prior to testing the asset group for recoverability. 142.29. If goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time the other asset (or asset group) shall be tested forimpairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under Statement 144 (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test If the asset group was impaired the impairment lossthe goodwill impairment test. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment. • Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 • Goodwill under SFAS 142 30Valuation Research Corporation
  • 31. Conclusions: Putting It All Together • Reporting Unit 2 failed step 1 test • Fair value = $300 • Carrying value = $400 I i t f i d fi it li d t f $5• Impairment of an indefinite-lived asset of $5 • Impairment of long-lived assets of $10 Reporting Fair Carrying Asset Adjusted Conclusiong Unit Value y g Value Impairment j Carrying Value RU1 $500 $350 0 $350 No Impairment RU2 $300 $400 $15 $385 Impairment still indicated, proceed to step 2 Total $800 $750Total $800 $750 Market cap $700 Implied Control Premium 14.3% 31Valuation Research Corporation Premium
  • 32. Conclusion: Putting It All Together • Reporting Unit 2 failed step 1 test • Fair Value = $300 • Carrying Value = $400; Adjusted Carrying Value = $385 A f thi l th t b k l f PP&E d i t ibl t• Assume for this example that book value of PP&E and intangible assets are a reasonably estimate of fair value. R ti U it 2 B k V l Adj t d F i V l 142/144Reporting Unit 2 Book Value Adjusted Carrying Value Fair Value 142/144 Impairment Net Assets $400 $385 $300$400 $385 $300 Working Capital 70 70 70 PP&E 50 48 50 2 I t ibl 120 107 130 13Intangibles 120 107 130 13 Goodwill 160 160 50 110 Total Impairment 125 32Valuation Research Corporation
  • 33. Summary & Order of Impairment Testing Asset Type Indefinite-lived Intangible Assets Long-lived Tangible & Intangible Assets Goodwill Intangible Assets Accounting Guidance SFAS 142 SFAS 144 SFAS 142 Focus Indefinite-lived Intangible assets carried at lower of FV Test the recoverability of long lived assets Goodwill carried at lower of FV or CV carried at lower of FV or CV long-lived assets Methodology One step Multiple steps Two step Frequency Annually/event based Event based Annually/event basedFrequency Annually/event based Event based Annually/event based 33Valuation Research CorporationValuation Research Corporation
  • 34. Contact Information PJ Patel ppatel@valuationresearch.com 609 243 7030609-243-7030 Ed Hamilton ehamilton@valuationresearch.com 609-243-7018 34Valuation Research CorporationValuation Research Corporation
  • 35. U.S. Office Locations Boston 101 Federal Street Boston, MA 02110 Milwaukee 330 East Kilbourn Avenue Milwaukee, WI 53202 1 2 1 8662 San Francisco 50 California Street , Suite 3050 San Francisco, CA 94111 1 2 1800617.342.7366 Chicago 200 W. Madison Street Chicago, IL 60606 414.271.8662 New York 500 Fifth Avenue New York, NY 10110 415.277.1800 Tampa 777 S. Harbour Island Blvd. Tampa, FL 33602Chicago, IL 60606 312.957.7500 Cincinnati 105 East Fourth Street Cincinnati OH 45202 , 212.983.3370 Princeton 200 Princeton Corporate Center 813-463-8510 Cincinnati, OH 45202 513.579.9100 Ewing, NJ 08628 609.452.0900 35Valuation Research CorporationValuation Research Corporation
  • 36. International Affiliate Office Locations Buenos Aires Franklin D. Roosevelt 2445 Piso 10 London Cloister House Riverside Monterrey Antonio Gaona No. 2000-401 Col. Florida Buenos Aires C1428 BOK Argentina Caracas Oficina 1-3, Torre Charan, New Bailey Street Manchester, M3 5AG Madrid Alcalá, 265, Edificio 2 Monterrey, N.L. C.P. 64810 Mexico Avenida Los Mangos Las Delicias, Caracas 1050 Venezuela Hong Kong 22nd Floor Siu On Centre 28027 Madrid Spain Melbourne Level 10 470 Collins St São Paulo Rua Alvarenga 1757 Butantã 05509-004 São Paulo SP Brazil 22nd Floor, Siu On Centre 188 Lockhart Road Wanchai, Hong Kong Level 10, 470 Collins St. Melbourne, Victoria 3000 Australia 36Valuation Research CorporationValuation Research Corporation

×