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

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Implementation AidsChapter 5The SEC is concerned that financial statements properly reflect acquired assets at theirfair values. It is safe to assume that they will place a similar level of emphasis onnonamortizable assets as they have on in-process research and development, and willbe looking for instances of overvaluation of nonamortizable intangible assets.Management should be aware that the overvaluation of nonamortizable assetsincreases the potential of later having to recognize impairment charges on suchassets. If impairment losses become commonplace, investors may begin to questionmanagement’s ability to make successful acquisitions. Therefore, it is vital thatpurchase price allocations and impairment testing be done by a qualified professional.Management may conduct impairment testing internally only if company personnelcan meet the criteria of Statement on Auditing Standards (SAS) 73, Using theWork of a Specialist. Auditors will be reviewing management’s qualifications andwork product to ensure that the requirements of SAS 73 and SFAS Nos. 141, 142 and157 are met. Most auditors are interpreting the new independence standards as notallowing the auditor to perform SFAS Nos. 141, 142 and 157 services.The services of an independent valuation specialist are usually required inestimating the fair value of assets acquired in a business combination. Some entitiesemploy valuation specialists in their organizations; others will find it necessary toengage the services of an external valuation specialist. Regardless of who performsthe valuation, the auditor should determine that the specialist has the requisite skillsand expertise to develop a valuation of the acquired assets in conformity with GAAP.A review of the qualifications of the appraiser should be at the same high level asthat for any critical professional. These qualifications should focus on the appraiser’sskill, education, and experience and may include:Specialized training in business valuationSpecialized training in valuing intangible assetsAudit experience or exposure to comprehend the audit environment for thevaluationRecognized business valuation designationsPostgraduate educationProfessional leadership activities at the state or national levelUnique professional activity such as serving on task forces or committees fororganizations like the SEC, SFAS, or AICPA on these issuesKnowledge of the elements of SFAS Nos. 141, 142 and 157, including criticallyrelated SFAS Nos. 144 (impairment) and 131 (segment reporting), as well as others185
186 Valuation for Financial ReportingExperience in rendering opinions related to intangible assetsExperience defending valuation opinions (e.g., SEC)So, what steps should companies take when they are faced with implementingSFAS Nos. 141, 142 and 157? We recommend that companies:Consider creating new accounts to capture adjustments that may be needed toeffectively provide the information necessary for goodwill impairment testingClarify management’s role in data gatheringGet the auditors involved as soon as possibleSelect appraisers and involve them as soon as possibleClearly definethe scopeof the engagementandtheresponsibilities andexpectationsofeach oftheinvolvedparties (i.e., company management, auditors, andappraisers)Promptly complete financial statements before the due datesThe steps outlined in Procedures for the Valuation of Intangible Assets (Exhibit5.1 at the end of the chapter) are provided to assist auditors, management, and valuersin compiling operational information that will aid in assigning values to intangibleassets acquired in a business combination. These procedures will also assist indetermining the appropriate valuation approach for each intangible asset (i.e.,cost, market, income). The Valuation Information Request—Intangible Assets (Exhibit5.2 at the end of the chapter) can be used with these procedures to assist ingathering necessary information.A portion of the purchase price in a purchase business combination may beallocated to In-Process Research and Development (IPR&D), but IPR&D is particularlycommon in acquisitions of software, electronic devices, and pharmaceuticalcompanies. This model audit program outlines audit procedures that should beconsidered when an entity has consummated a purchase business combinationthat may involve IPR&D.The Model Audit Program procedures focus on the software, electronic devices,and pharmaceutical industries. Further tailoring of the recommended procedures maybe necessary upon review of the specific circumstances of each acquisition. Thesemodifications may be influenced by the business, legal, and regulatory environmentsof both the acquiring company and the acquiree. Hence in tailoring the recommendedprocedures to each acquisition, the auditors should apply their professional judgmentin correlation with the knowledge of the environments of the acquiring company andthe acquiree.
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VALUATION FORFINANCIALREPORTINGFair
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VALUATION FORFINANCIALREPORTINGFair
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To our familiesnear and faryoung an
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PrefaceThe second edition of this b
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AcknowledgmentsTo Deanna Muraki, th
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xivAbout the Authorsappraiser with
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Valuation for FinancialReportingFai
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Appendix 1.2Pronouncements Excluded
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Intellectual PropertyAppendix 2.1On
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Appendix 2.2Significant Changes in
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Exhibit 3.4 Target Company Business
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Exhibit 3.7 Target Company Valuatio
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Exhibit 3.10 Target Company Calcula
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Exhibit 3.16 (Continued)Total Fair
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Exhibit 3.19 Target Company Valuati
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Exhibit 3.22 Target Company Calcula
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Exhibit 3.24 (Continued)Sum of Retu
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Exhibit 3.27 Target Company Summary
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Page 231 and 232: 210 IndexBusiness Enterprise Analys
Page 233 and 234: 212 IndexGoodwill (continued )111,
Page 235 and 236: 214 IndexLong-termcapital, 71debt,
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