Sfas141 R Presentation(11.11.08)


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SFAS 141r / 157

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Sfas141 R Presentation(11.11.08)

  1. 1. Preparing for SFAS 141R November 12, 2008
  2. 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 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 with representatives from the FASB, the SEC, and the PCAOB to discuss valuation issues surrounding financial reporting. Valuation Research Corporation 2
  3. 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 Foundations Working Group, which is preparing a Practice Aid for valuing 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. He will be speaking on Business Combinations on December 10, 2008 at the AICPA SEC Conference. Valuation Research Corporation 3
  4. 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. • He holds a B.S. in physics from Rowan University, and an M.B.A. in finance from Temple University. Valuation Research Corporation 4
  5. 5. Agenda • Major Changes in Business Combination Accounting • Purchase Accounting/Valuation Issues: • Is it a business combination? • What is the purchase price? • How to account for transaction and restructuring costs? • How to account for contingent consideration? • How t account for IPR&D? H to tf • Post-reporting adjustments to acquisition accounting • What is the impact of SFAS No. 157? • Post-transaction Issues • How to account for changes in the fair value of contingent consideration? • How to account for IPR&D? • Impairment testing g • Case Study • Summary of Key Issues Valuation Research Corporation 5
  6. 6. SFAS 141 vs. SFAS 141R SFAS 141 • Allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition • Use of fair value concepts, for example: • Receivables - PV at current interest rates less allowances • Raw materials inventory at current replacement costs • WIP and FG inventory at selling price less cost to complete, disposition costs and reasonable profit margin • PP&E at replacement cost SFAS 141R • Recognizes the fair value of the assets acquired, liabilities assumed and any noncontrolling interest with limited exceptions. y g p • All assets/liabilites at fair value with limited exceptions. Valuation Research Corporation 6
  7. 7. SFAS 141R - Implementation Effective Date • Applied prospectively to business combinations for which the transaction date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. • Many EITFs nullified and subsumed into the standards, including: • 01-3 – Accounting in a Business Combination for Deferred Revenue of an Acquiree • 02-17 – Recognition of Customer Relationship Intangible Assets Acquired in a Business C bi ti B i Combination • 04-1 – Accounting for Preexisting Relationships between the Parties to a Business Combination Valuation Research Corporation 7
  8. 8. 141R – Overview of Major Changes Item It 141 141R Impact I t Terminology “Purchase Method” “Acquisition Method” Definition of A business is a self-sustaining integrated set An integrated set of activities and a Business of activities and assets conducted and managed assets that is capable of being for the purpose of providing a return to conducted and managed for the investors. A business consists of (a) inputs, (b) purpose of providing a return in the processes applied to those inputs, and (c) form of dividends, lower costs, or other resulting outputs that are used to generate economic benefits directly to investors revenues. For a transferred set of activities and or other owners, members, or assets to be a business, it must contain all of participants. A business consists of i i b i i f the inputs and processes necessary for it to inputs and processes applied to those continue to conduct normal operations after the inputs that have the ability to create transferred set is separated from the transferor, outputs. Although businesses usually which includes the ability to sustain a revenue y have outputs, outputs are not p , p stream by providing its outputs to customers. required for an integrated set to qualify as a business. Definition of EITF No. 98-3; acquisition of process Lower threshold More entities a Business applied to inputs to make outputs. considered Capable of providing a return to businesses; Many development-stage businesses investors or dividends, lower costs or in particular excluded. other economic benefits. development stage companies. Valuation Research Corporation 8
  9. 9. 141R – Overview of Major Changes Item It 141 141R Impact I t Definition of Assets acquired through Transaction or other event in More transactions Business exchange of consideration. which acquirer obtains control, considered business Combination including share repurchase, combinations. minority veto rights lapse, contract alone no transfer (dual listing, stapling arrangement). Business Goodwill, assets based on If control is obtained, all assets Greater clarity as fair value Combination acquired interest. interest and liabilities are recognized at is applied consistently. consistently Achieved in fair value. Stages (aka Certain ratios are changed. If control is obtained, remeasure “Step previously held equity interest at Acquisition”) fair value, recognize gain/loss. Noncontrolling Goodwill, assets based on Recognize at fair value. Fair Valuation of Interest acquired interest. value and pro-rata value may noncontrolling interest differ due to inclusion or control may be required. premium/discount for lack of control. t l Valuation Research Corporation 9
  10. 10. 141R – Overview of Major Changes Item It 141 141R Impact I t Acquisition Date Measurement date for equity Measured on date control is Uncertainty regarding value consideration is around obtained. of equity consideration. announcement date. Usually closing date. Purchase accounting reflects All other consideration at th id ti t value on the acquisition l th i iti closing. date. Transaction and Transaction costs add to cost Transaction costs expensed as Purchase price excludes Acquisition- of business. incurred. transaction related Related expenses, expenses thus lower lower. Restructuring costs recorded Restructuring costs expensed as d Restructuring as a liability. incurred unless recognizable Expenses before and after Costs under SFAS 146 at acquisition transaction likely higher. date. Transaction related restructuring considered to occur after t ft transaction. ti Contingent Generally adds to the cost of Estimate at fair value on Need to calculate fair value Consideration an acquisition and recognized acquisition date. i iti d t of contingent consideration when resolved. at the transaction date and Changes in value generally in future periods. recognized in earnings. Valuation Research Corporation 10
  11. 11. 141R – Overview of Major Changes Item 141 141R Impact Contingent “A contingent consideration Certain contingent Consideration arrangement in which the payments consideration may be are automatically forfeited if compensation for employment terminates is postcombination services services. compensation for postcombination services.” A87.a. Bargain Purchase Pro-rata reduction – “Cram Assets acquired at fair value. Down.” Gain in income statement. statement Contingent Not recognized at fair value 141R initially called for increased use Assets and in purchase accounting. of Fair Value related to Contingent Liabilities Assets and Liabilities. Handled by other GAAP. Contingent Assets not Certain groups had significant typically recognized. concerns. Currently, very likely no change vs. 141. Valuation Research Corporation 11
  12. 12. 141R – Overview of Major Changes Item It 141 141R Impact I t Indemnification Recognized at same time, measured on Asset same basis, as indemnified liability. If FV then FV. IPR&D Expensed on acquisition Capitalized with an indefinite life Accounted for differently, and tested under SFAS 142. valued the same. Amortized once completed, write-off if Subsequent accounting may abandoned. be complex; difficult to track specific projects. Adjustments to One year to complete Initially, provisional amounts are Increased time pressure and business purchase accounting recognized. earlier inclusion of valuation combination professionals in the M&A Adjustments reflected in Subsequently, provisional amounts revised accounting process. period of change in prior periods back to acquisition date. Valuation Research Corporation 12
  13. 13. SFAS No. 157 • Defines 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 measurement date y • Establishes a framework for measuring fair value • Exit price vs. entry price • Principal/most advantageous market • Use of market participant inputs rather than company-specific inputs • Fair value hierarchy – Level 1, 2 and 3 inputs • Unit of account/valuation • Assets – highest and best use • Liabilities – nonperformance risk/credit risk Valuation Research Corporation 13
  14. 14. Example: Assets – Highest and Best Use Example (paragraph A7-A9) • The reporting entity, a strategic buyer, acquires a group of assets (A, B, and C) in a business combination. Asset C is technology developed by the acquired entity for its own use in conjunction with Assets A and B (related assets). The reporting entity measures the fair value of each of the ( ) p g y assets individually, consistent with the specified unit of account for the assets. The reporting entity determines that each asset would provide maximum value to market participants mainly through its use in combination with other assets as a group (highest and best use is in-use). • The fair values of Assets A, B, and C would be based on the use of the assets as a group within the strategic buyer group ($100 $100 and $50) Alth t t i b ($100, $100, d $50). Although th use of th assets within th strategic b h the f the t ithi the t t i buyer group does not maximize the fair value of each of the assets individually, it maximizes the fair value of the assets as a group ($250). STRATEGIC FINANCIAL BUYER BUYER Trademark – A 100 50 Customer relationships – B 100 70 Technology - C 50 70 TOTAL 250 190 Valuation Research Corporation 14
  15. 15. Case Study • Company A buys a competitor (Company B) for ~$2 billion. • The transaction is structured as a stock deal, paid for using the acquirer’s stock. • The deal is announced on 1/1/09 and closes on 3/31/09. • In addition to the purchase price, the acquirer agrees to pay the seller an earn- out of $400 million payable over the next 3 years if certain financial metrics are met. The selling shareholders will not be staying on with the Company. • The company is currently subject to a p p y y j patent infringement related litigation. The g g acquirer is not indemnified for this potential liability. • The Company has the following intangible assets: • Trademark • Customer relationships • Technology – which you plan on discarding post-acquisition because if developed the technology cannibalize one of your existing products defensive asset. • IPR&D Valuation Research Corporation 15
  16. 16. Case Study In accounting for this transaction we need to address: • Is this a business combination? • What is the purchase price? • How to account for contingent consideration? • What is the fair value of other assets and liabilities acquired? • How does SFAS No. 157 impact the valuation? • What is the value of defensive assets – technology? • What issues will we face post-transaction? • IPR&D • Defensive assets • Impairment Valuation Research Corporation 16
  17. 17. Change in the Purchase Price Account (in 000’s) 141 Allocation 141R Allocation Comments Measurement Date 1/1/09 3/31/09 Reflects closing date rather than reasonable period around Stock price $2.0 $2.10 announcement date Shares exchanged 1,000 1,000 Purchase Price $2,000 $2,100 Valuation Research Corporation 17
  18. 18. Change in Total Consideration Account 141 Allocation 141R Allocation Comments Purchase Price $2,000 $2,100 Reflects FV at acquisition date Transaction Expenses 10 0 Transaction expenses no longer capitalized Earn Out 0 200 Reflects FV Contingent Liability 0 0 No longer identified under 141R Total Consideration 2,010 2,300 Valuation Research Corporation 18
  19. 19. Changes to Asset Values Account A Book V l B k Value 141 Allocation All i 141R All Allocation i Comments C Working capital 250 250 200 Reflects FV of all WC items Real Property 50 100 150 FV Personal Property 250 300 300 FV Trademark 0 100 100 FV as a group consistent with SFAS Customer Relationships 0 100 100 No. 157. Values reflect highest and best use Technology (defensive asset) 0 0 50 of the group of assets. IPR&D 0 150 150 Valuation Research Corporation 19
  20. 20. 141 vs. 141R Allocation Summary Account Book Value 141 Allocation 141R Allocation Comment Purchase Price $2,000 $2,100 Reflects FV at closing Date Transaction Expenses 10 0 Expense immediately Earn Out 0 0 200 FV Contingent Liability 0 0 0 Total Consideration 2,010 2,300 Working capital 250 250 200 FV Real Property 50 100 150 FV based on principal marketplace Personal Property 250 300 300 FV Trademark 0 100 100 FV as a group consistent with SFAS No. 157. Customer Relationships p 0 100 100 values reflect highest Technology (defensive 0 0 50 and best use of the asset) group of assets. IPR&D 0 150 150 Goodwill 0 1,010 1,250 Indefinite Valuation Research Corporation 20
  21. 21. Post-Transaction Issues • What issues will we face post-transaction? • IPR&D • Defensive assets • Impairment testing Valuation Research Corporation 21
  22. 22. Post-Transaction – IPR&D One year post-acquisition, the outcome of the IPR&D project is still incomplete. However management is now less optimistic about the project. project As such the fair value of the IPR&D project is now $100 such, million, with the change in value reflected in the income statement. Period Fair Value Balance Sheet Income Statement Acquisition Date A i iti D t $150 m Purchase accounting entry P h ti t No N amortization, no i ti ti impact t of $150 m One Year Later $100 m Adjust BS to reflect FV of $50 m expense $ $100 m Valuation Research Corporation 22
  23. 23. Post-Transaction – Defensive Assets One year post-acquisition, the outcome of the Company has met its revenue and earnings targets and remains optimistic about the growth and earnings The technology was discarded as planned however earnings. planned, since the Company passes the step 1 recoverability test under SFAS No. 144, the asset remains on the Company’s balance sheet and continues to be amortized. Valuation Research Corporation 23
  24. 24. Impairment Testing • SFAS No.144 • Finite lived Assets: • PP&E, amortizable intangibles (including defensive assets) • Look at undiscounted cash flows of the asset group to determine if impairment exists • Determine FV of the asset group to determine level of impairment. Write down assets on a pro-rata basis to reflect impairment amount with the minimum value of any asset being its fair value • SFAS No.142 • Indefinite lived assets: • trademarks, IPR&D while incomplete • Fair value to carrying value test • Goodwill – indefinite-lived SFAS No.142 • Step 1: compare fair value of the reporting unit to carrying value if impairment value, indicated proceed to Step 2 • Step 2: perform a 141-type purchase price allocation (PPA) to determine level of goodwill impairment Valuation Research Corporation 24
  25. 25. Summary of Key Issues • Conceptual change in business combination rules • OBS reflects FV at acquisition date • M More t transactions qualify as a Business C bi ti ti lif B i Combination • Purchase Accounting Issues • Do we value A/R, inventory and other working capital items? • Is there an contingent consideration? any • Are there any defensive assets? • Timing • Post reporting changes to acquisition accounting requires prospective revisions Post-reporting of historical time periods • Post-Transaction Issues • I/S volatility • Contingent assets/liabilities • IPR&D capitalized and then amortized when project is complete or impaired if project is discarded Valuation Research Corporation 25
  26. 26. Contact Information PJ Patel ppatel@valuationresearch.com 609-243-7030 609 243 7030 Ed Hamilton ehamilton@valuationresearch.com 609-243-7018 Valuation Research Corporation 26
  27. 27. 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 27
  28. 28. 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 28