Valuation for Financial Reporting : Fair Value Measurements and ...

Case Study 2: Impairment Under SFAS No. 142 113Amortization BenefitDiscount Rate 17.0%Tax Rate 40.0%Tax Amortization Period (Years) 15Amortization Benefit 1,294,507Fair Value of Software, Rounded $8,430,000SOFTWARE DEVELOPMENT COSTS—ESTIMATED PROJECT TEAMFunctionNumberBurdenedHourly RateProject Manager 1 $210.00Systems Analyst 2 160.00Technical Writer 1 130.00Programmer 4 120.00Support 2 55.00Blended Hourly Rate, Rounded $125.00Footnotes:(1) Lines of code per hour, based on productivity assessment for average module of programming.(2) Estimate based on number of lines of redundant/extraneous code, effective age, and remainingeconomic life of system. Remaining useful life is three years.Note: Some amounts may not foot due to rounding.The impairment test presented in this example is assumed to be performed as of December 31, 2007.# Copyright 2007 by FVG Holdings, LC and Financial Valuation Solutions, LLC. All rights reserved. Used with permission.Trademarks/Trade NameAs discussed earlier, Target Company has one valuable trade name. All of theCompany’s products and services are sold under the ‘‘XXX’’ trade name, andeach major product is identified by this trade name.The relief from royalty method was employed. A royalty rate of 2% is againapplicable, stated as a percentage of sales. Applying this same rate to a lower salesforecast obviously results in a lower fair value as of December 31, 2007.The rights to use the trade name transfer to the buyer in perpetuity, giving it anindefinite life. The fair value of the trade name is the present value of the royaltiesforecast for the ten-year period of 2008 to 2017, plus the present value of the residualat the end of the ten-year period, plus the amortization benefit. A 16% rate of returnwas again chosen to reflect a risk assessment that the trade name was about as risky asthe business overall.Based on our analysis as presented in Exhibit 3.20, we concluded that theaggregate fair value of the trade name as of the valuation date was $9,230,000.Because the carrying amount of this asset exceeds the fair value, the asset is