Brad Pursel responds to FASB’s new exposure draft relating to goodwill impairment testing
Last week FASB published an exposure draft related to goodwill impairment testing under ASC 350 that, if adopted, would result in the below changes to GAAP. The stated objective of the Exposure Draft is to reduce the cost and complexity faced by financial statement preparers related to complying with the Step One goodwill impairment test (note: indefinite-lived intangible asset testing is not addressed). Brad Pursel (Brown Smith Wallace) provided BVWire with a summary of significant proposed updates:
- Companies can no longer carry over the fair value determination from a prior year impairment test.
- A qualitative approach would eliminate need to perform a quantitative evaluation unless qualitative evaluation results in more likely than not (i.e., greater than 50%) probability that carrying value exceeds fair value.
- If the carrying value is zero or negative and qualitative evaluation results in more likely than not probability that goodwill is impaired, then companies may proceed directly to Step Two.
- In terms of disclosure, there is no need to disclose Level 3 assumptions when analyzing goodwill impairment.
Brad’s conclusion as to whether this will make impairment testing easier? “After reviewing the Exposure Draft and considering my experience both providing valuation services as well as reviewing valuations on behalf of audit clients, I do not believe that adoption of the Exposure Draft would achieve its stated objective of reducing the cost and complexity of complying with the Step One goodwill impairment test,” he says.
“For situations where it is obvious that there is no impairment, my experience has been that public accounting firms are generally not requiring a third party valuation. Exceptions may include public companies where there are some ‘non slam dunk’ reporting units and there is a need to reconcile sum of the parts to overall valuation of the company. Most importantly, in my opinion, the current guidance already includes a qualitative approach related to carry forward option of prior fair value measurement, which preparers have indicated public accountants are generally uncomfortable relying upon.”
The comment period for the proposal ends June 6, and the new standards would be effective for impairment tests performed for fiscal years beginning after December 15, 2011 (if approved.) According to FASB “interested parties providing their comments by letter should submit their letters by email to email@example.com, File Reference No. 2011-180.”
Check the June issue of the Business Valuation Update for Pursel’s complete analysis of the Exposure Draft.
Damodaran on the impact of Japan-like catastrophes on value
In his recent Musings on Market blog post “Catastrophe and Consequences for Value” Aswath Damodaran (Stern School of Business, NYU) focuses on the impact of catastrophes on markets and asset values. After illustrating some common themes Aswath poses a couple of questions, one of which is:
- How do you incorporate the risk that catastrophes can occur in the future into valuation models?
“If we define catastrophes as low-probability, high-impact events that affect most companies in an economy,” he answers. “There are three ways in which we can incorporate those events into value:”
- Adjust cash flows for an expected insurance cost
- Use a higher risk premium
- Allow for a higher probability of truncation risk
Management projections are key to
“This Court has consistently recognized the importance of management’s contemporaneous projections because the outcome of a DCF analysis depends heavily on the projections used in the model,” declared the Delaware Chancery Court in S. Muoio & Co. LLC v. Hallmark Entertainment Investments, 2011 WL 863007 (March 9, 2011). “Valuations that have ignored or altered management’s contemporaneous projections are sometimes completely discounted,” the court warned. Indeed, here the financial expert “had no legitimate reason for abandoning management projections in favor of his own more optimistic estimates,” simply because management’s numbers were “too low,” the court said, and rejected the expert’s DCF in its entirety.
In all cases, trust, but verify. In another case, the DE Bankruptcy Court applauded the debtors’ experts for analyzing two sets of management projections developed during reorganization, one that focused on “base case” estimates and another that assumed “worst” or contingency estimates, and then weighting them accordingly. (See In re Spansion, Inc., 426 B.R. 114 (2010)). Finally, in a third case concerning lost profits calculations, a federal district court faulted the damages expert for failing to independently analyze management sale estimates, citing several 7th Circuit cases that excluded evidence when the expert “relied on the party’s own internal financial projections without knowing the validity of the underlying data and assumptions upon which [they] were based.” (See Victory Records, Inc. v. Virgin Records Amer., Inc., 2011 WL 382743 (N.D. Ill.)(Feb. 3, 2011). Read the digests of all three cases in the June 2011 Business Valuation Update; the courts’ opinions will be posted soon at BVLaw.
Get the hands-on tools for analyzing the all-important management projections. Join Christine Baker (ParenteBeard) for the May 5th “Advanced Workshop on Management Projections and Forecasts.” Through BVR’s exclusive interactive web-workshop format, attendees can follow Baker’s in-depth tutorial, case-studies, and examples via a live, interactive web connection. Cynthia Rubin, Esq. (Flemming Zulack Williamson Zauderer) will provide insights into relevant case law as well as what the courts and attorneys are looking for when financial experts adopt, adjust, or substitute alternatives for management’s projections. CPE and CLE are available.
ASA now offers intangible asset valuation designation
The ASA is now offering a new designation in intangible asset valuation. The association cites the following reasons for developing the new designation:
- The increasing importance of intangible assets to business strategies and profitability, expanded financial reporting requirements regarding intangible asset
- Increased review of intangible asset valuations by regulatory groups including the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB)
- The increased uncertainty regarding asset values as a result of the recent Financial Crisis
- Complexities associated with the identification and valuation of the many different types of intangible assets.
Click here for more information.
2011 Mergerstat Review now in stock
The 2011 Mergerstat Review is now in stock and ready for delivery. It not only reviews the 2010 M&A activity in a statistical analysis section, but it also includes a 2010 industry analysis, a 2010 geographical analysis, details from completed and pending 2010 transactions in a transaction roster and a historical review going back 25 years.
Included with the hard cover book are monthly updates of M&A activity in the Factset Mergerstat Monthly Review (delivered via email in PDF format). Click here to view a few pages from the 2011 Review and click here to order your copy of the 2011 Mergerstat Review and Factset Mergerstat Monthly Review.
Expert provides marketing tips with the valuation practitioner in mind
Check the “Free Downloads” section of Barbara Walters Price’s (Mercer Capital) BW Price’s Marketing U blog for her free e-book 25 Marketing Best Practices for Professional Services Firms. The Guide offers the 25 marketing best practices and links the marketing and business development blogs that Barbara follows.
LinkedIn group addresses valuing LLCs and S Corps in divorce cases
The following question came up in the LinkedIn Business Valuation and Advisory Network group: “Is there a preferred method that any of you have for valuing LLCs and/or S Corps in divorce cases?” Gregg Hamilton-Piercy (KLR & Co.) responded:
“As it relates to pass through entities in general, we typically tax affect all cash flows when valuing the company since our discount rate is derived using C corp data. In addition, we develop a pass through entity premium to account for the (perceived) tax benefits of being a pass through entity. More often than not, we use Nancy Fannon's pass through premium model to do this which usually results in a premium between 3%-6%.“
Learn more about Fannon’s (Fannon Valuation) approch at the upcoming BVR webinar “Pass Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate” on May 26th. Two CPE credits are available.
Learn the nuances of valuing a business worth less than $1 million this week
This Thursday Ron Seigneur (Seigneur Gustafson), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos), and Michelle Gallagher (Gallagher & Associates, CPAs) share their expertise during BVR webinar “Valuing A Business Worth Less Than $2 Million.” This program will focus on all the classic challenges in small business appraisal and how recent economic turmoil has affected these already tricky valuation assignments. Two CPE credits are available.
And, Laro and Pratt hit the market with their updated Business Valuation & Federal Taxation
This is the must-have text in the field from Judge David Laro and Shannon Pratt. Besides the essentials the 2nd Edition (the first came out in 2005) includes coverage of:
- Personal versus enterprise goodwill
- New materials on transfer pricing and customs valuations and how recent markets have affected both the income and market approaches
- Coverage of the new fair value requirements
- Review of the new penalties and sanctions affecting both taxpayers and appraisers
- All the new US Tax Court and related cases, and
- Much, much more.
Order this standard reference source from BVR here.
Putting content on business valuation firm websites isn’t always as worthwhile as every one says
BVWire got the following response from David Freedman, Editor of NACVA’s The Value Examiner, in response to its item last week noting that few BV firms update their websites frequently. Thanks, David.
In your April 20 issue, you summarized BVR’s survey which found that most firms with websites are not actively updating them. "This tends to reduce the likelihood that these web sites will come up in natural search results in Google," you wrote.
Then you "suggest" that BV firms receive relatively little new business through their websites…this suggestion seems to assume that new business can be derived through websites only as a result of search engine results. This assumption is absolutely the wrong message to send to firms. In fact, the most important function of a website is to showcase the professionals' expertise and build trust. In some cases, websites saturated with SEO techniques (e.g., keyword density and gratuitous blog posting) come across as callow and untrustworthy.
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