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Sfas142 144 Presentation(02 23 09)

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Impairment Testing in the Current Environment

Impairment Testing in the Current Environment

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Sfas142 144 Presentation(02 23 09) Sfas142 144 Presentation(02 23 09) Presentation Transcript

  • Long Live the Asset! Impairment Testing in the Current Environment February 24, 2009
  • 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 purposes 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. Valuation Research Corporation 2
  • 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. 157 and other emerging issues. Mr. Patel recently spoke at the AICPA SEC conference in Washington D.C. Valuation Research Corporation 3
  • 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. 157 and other emerging issues. Valuation Research Corporation 4
  • Agenda – Issues in Accounting For Asset Impairment • Guidance • SFAS 142: Goodwill and Other Intangible Assets • Goodwill Testing Consists of Two Steps g 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 • Testing f R T ti for Recoverability bilit • Allocating Impairment • Impairment Testing Order • C Conclusion: P tti It All Together l i Putting T th Valuation Research Corporation 5
  • 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 intangible assets i t ibl t SFAS 157 Guidance on fair value measurements EITF 02 7 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 testing 2008 SEC Inclusion of a control premium Speeches Market cap reconciliation Interim impairment testing indicators Valuation Research Corporation 6
  • Summary of Impairment Testing Accounting SFAS 142 SFAS 144 Guidance Asset T A t Type Goodwill G d ill Indefinite-Lived I d fi it Li d Long-Lived L Li d Intangible Assets Tangible & Intangible Assets Focus Goodwill carried at Indefinite-lived Test the lower of FV or CV intangible assets recoverability of carried at lower of long-lived assets FV or CV & allocate impairment Methodology Two step One step Multiple steps Frequency Annually/event Annually/event Event based based based Valuation Research Corporation 7
  • Impairment Testing • Goodwill under SFAS 142 • Indefinite-Lived Assets under S S 142 f SFAS • Long-Lived Assets under SFAS 144 Valuation Research Corporation 8
  • Goodwill Impairment Testing - Issues • When to Test? • Testing Methodology • Current Issues Valuation Research Corporation 9
  • 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 g g p g goodwill to be 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 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 a subsidiary that is a component of a reporting unit. Valuation Research Corporation 10
  • 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? Valuation Research Corporation 11
  • Step 1: Does Goodwill Impairment Exist? • Paragraph 19 of SFAS 142 outlines step 1 of goodwill impairment testing • Step 1 i St 1, is used to identify potential i d t id tif t ti l impairment i t • 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 Valuation Research Corporation 12
  • 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 specific d t or range of d t t determine control premium. No ifi date f dates to d t i t l i • 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 inputs Valuation Research Corporation 13
  • 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 ( g p p g (RU1) has a ) 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 indicated indicated, proceed to step 2 Total $800 $750 Market Cap $700 Implied Control Premium 14.3% Valuation Research Corporation 14
  • 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 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 residual g 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 a basis. previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed. Valuation Research Corporation 15
  • Step 2: Determining the Level of Goodwill Impairment • Reporting Unit 2 failed step 1 test • Fair value = $300 • Carrying value = $400 • Assume for this example that book value of PP&E and i t A f thi l th t b k l f d intangible assets are a ibl t 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 50 110 Valuation Research Corporation 16
  • Impairment Testing • Goodwill under SFAS 142 • Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 Valuation Research Corporation 17
  • Intangible Assets Not Subject to Amortization • Guidance is in SFAS 142, paragraph 17 • Testing is annual with event based testing • Largely consists of trademarks/brands, certain licenses • Test compares fair value to carrying value • If fair value i l f i l is less th th carrying value, th diff than the i l the difference i th is the impairment amount • Subsequent reversal is prohibited Valuation Research Corporation 18
  • 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: 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 expected g 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) long lived 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. Valuation Research Corporation 19
  • 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? Valuation Research Corporation 20
  • 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 $35 12/31/08. while Trademark 2 has a carrying value of $45. The table below summarizes the value conclusions. Fair Value Carrying Difference Conclusion Value Trademark 1 $40 $35 $5 No impairment Trademark 2 $40 $45 ($5) Impairment, write down asset by $5 b Valuation Research Corporation 21
  • Impairment Testing • Goodwill under SFAS 142 • Indefinite-Lived Assets under SFAS 142 • Long-Lived Assets under SFAS 144 Valuation Research Corporation 22
  • 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 value of a l l f long-lived asset ( li d t (asset group), i l di an adverse action or assessment b a t ) including d ti t by 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. current-period 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) 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 p p g y previously estimated useful life. y Valuation Research Corporation 23
  • 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 assets capital assets • Asset group does not include goodwill unless the asset group is also a reporting unit. Company Reporting Reporting Unit 2 Unit 1 Asset Asset Asset Asset Group Group 1 Group 2 Group 3 • Issue: How to determine asset groups? Valuation Research Corporation 24
  • 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 are expected t arise as a di t result of the use and eventual t d to i direct lt f th d t l disposition of the asset (asset group). “ • Excludes interest and, per recent guidance from several leading firms, taxes. • Entity uses its own assumptions of asset use and should consider all available information. Issues: • 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 the asset group? Valuation Research Corporation 25
  • 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 Undiscounted Carrying Conclusion Unit Cash flow Value Asset Group 1 $60 $50 No impairment Asset Group 2 $70 $130 Impairment indicated, p proceed to fair value test Asset Group 3 $30 $60 Impairment indicated, proceed to fair value test Total $160 $240 Goodwill $160 Unallocated as the asset groups are components of the reporting unit p g Valuation Research Corporation 26
  • Step 2: Determine Fair Value and Allocate Impairment • The asset group is impaired by the amount its carrying value exceeds its fair value 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 value. Valuation Research Corporation 27
  • 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. Undisc Fair Value Carrying Conclusion Cash flow Value 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 2 Total $160 $300 $190 Goodwill $160 Unallocated as the asset g oups a e co po e s o groups are components of the Reporting Unit Valuation Research Corporation 28
  • 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 % of Fair Pro –Rata Allocation of Adjusted Value Total Value Allocation impairment Book Value Working Capital $10 n/a 0 0 $10 Fixed Assets 20 40% 18 4 2 18 Customer 10 20% 12 2 0 10 relationships Technology 20 40% 7 4 8 12 Total 60 10 10 50 Valuation Research Corporation 29
  • 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 g g p j pp generally 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 for time 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 loss test impaired, 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 Valuation Research Corporation 30
  • Conclusions: Putting It All Together • Reporting Unit 2 failed step 1 test • Fair value = $300 • Carrying value = $400 • Impairment of an indefinite-lived asset of $5 I i t f i d fi it li d t f • Impairment of long-lived assets of $10 Reporting g Fair Carrying y g Asset Adjusted j Conclusion Unit Value Value Impairment Carrying Value RU1 $500 $350 0 $350 No Impairment RU2 $300 $400 $15 $385 Impairment still indicated, proceed to step 2 Total $800 $750 Market cap $700 Implied Control 14.3% Premium Valuation Research Corporation 31
  • Conclusion: Putting It All Together • Reporting Unit 2 failed step 1 test • Fair Value = $300 • Carrying Value = $400; Adjusted Carrying Value = $385 • Assume for this example that book value of PP&E and i t A f thi l th t b k l f d intangible assets are a ibl t reasonably estimate of fair value. Reporting Unit 2 R ti U it Book Value Adj t d B kV l Adjusted Fair V l F i Value 142/144 Carrying Impairment Value Net Assets $400 $385 $300 Working Capital 70 70 70 PP&E 50 48 50 2 Intangibles I t ibl 120 107 130 13 Goodwill 160 160 50 110 Total Impairment 125 Valuation Research Corporation 32
  • Summary & Order of Impairment Testing Asset Type Indefinite-lived Long-lived Goodwill Intangible Assets Tangible & Intangible Assets Accounting SFAS 142 SFAS 144 SFAS 142 Guidance Focus Indefinite-lived Test the Goodwill carried at Intangible assets recoverability of lower of FV or CV carried at lower of FV long-lived long lived assets or CV Methodology One step Multiple steps Two step Frequency Annually/event based Event based Annually/event based Valuation Research Corporation 33
  • Contact Information PJ Patel ppatel@valuationresearch.com 609-243-7030 609 243 7030 Ed Hamilton ehamilton@valuationresearch.com 609-243-7018 Valuation Research Corporation 34
  • U.S. Office Locations Boston Milwaukee San Francisco 101 Federal Street 330 East Kilbourn Avenue 50 California Street , Suite 3050 Boston, MA 02110 Milwaukee, WI 53202 San Francisco, CA 94111 617.342.7366 414.271.8662 1 2 1 8662 415.277.1800 1 2 1800 Chicago New York Tampa 200 W. Madison Street 500 Fifth Avenue 777 S. Harbour Island Blvd. Chicago, IL 60606 New York, NY 10110 , Tampa, FL 33602 813-463-8510 312.957.7500 212.983.3370 Cincinnati Princeton 105 East Fourth Street 200 Princeton Corporate Center Cincinnati, Cincinnati OH 45202 Ewing, NJ 08628 513.579.9100 609.452.0900 Valuation Research Corporation 35
  • International Affiliate Office Locations Buenos Aires London Monterrey Franklin D. Roosevelt 2445 Cloister House Antonio Gaona No. 2000-401 Piso 10 Riverside Col. Florida Buenos Aires C1428 BOK New Bailey Street Monterrey, N.L. Argentina Manchester, M3 5AG C.P. 64810 Mexico Caracas Madrid Oficina 1-3, Torre Charan, Alcalá, 265, Edificio 2 Avenida Los Mangos 28027 Madrid São Paulo Las Delicias, Caracas 1050 Spain Rua Alvarenga 1757 Butantã Venezuela 05509-004 São Paulo SP Brazil Hong Kong Melbourne 22nd Floor Siu On Centre Floor, Level 10, 470 Collins St 10 St. 188 Lockhart Road Melbourne, Victoria 3000 Wanchai, Hong Kong Australia Valuation Research Corporation 36