Statement of Financial Accounting Standards No. 157 - Paper Audit ...

securities. An acquiring entity often is willing to pay more for equity
securities that give it a controlling interest than an investor would pay for a
number of equity securities representing less than a controlling interest. That
control premium may cause the fair value of a reporting unit to exceed its
market capitalization. The quoted market price of an individual equity
security, therefore, need not be the sole measurement basis of the fair value
of a reporting unit.
16 Substantial value may arise from the ability to take advantage of synergies and other benefits
that flow from control over another entity. Consequently, measuring the fair value of a
collection of assets and liabilities that operate together in a controlled entity is different from
measuring the fair value of that entity’s individual equity securities. An acquiring entity often
is willing to pay more for equity securities that give it a controlling interest than an investor
would pay for a number of equity securities representing less than a controlling interest. That
control premium may cause the fair value of a reporting unit to exceed its market
capitalization.
e. Paragraph 24:
If quoted market prices are not available, the estimate of fair value shall be
based on the best information available, including prices for similar assets and
liabilities and the results of using other valuation techniques. A present value
technique is often the best available technique with which to estimate the fair
value of a group of net assets (such as a reporting unit). If a present value
technique is used to measure fair value, estimates of future cash flows used in
that technique shall be consistent with the objective of measuring fair value.
Those cash flow estimates shall incorporate assumptions that marketplace
participants would use in their estimates of fair value. If that information is
not available without undue cost and effort, an entity may use its own
assumptions. Those cash flow estimates shall be based on reasonable and
supportable assumptions and shall consider all available evidence. The weight
given to the evidence shall be commensurate with the extent to which the
evidence can be verified objectively. If a range is estimated for the amounts
or timing of possible cash flows, the likelihood of possible outcomes shall be
considered. Concepts Statement 7 discusses the essential elements of a
present value measurement (paragraph 23), provides examples of circumstances
in which an entity’s cash flows might differ from the market cash
flows (paragraph 32), and discusses the use of present value techniques in
measuring the fair value of an asset or a liability (paragraphs 39–54 and
75–88). Appendix E of this Statement incorporates those paragraphs of
Concepts Statement 7.
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