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

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# Copyright 2007 by FVG Holdings, LC and Financial Valuation Solutions, LLC. All rights reserved. Used with permission.Exhibit 3.2 Target Company Allocation Formula65
66 Valuation for Financial Reportingby James Hitchner (Hoboken, New Jersey: John Wiley & Sons, Inc., 2006). Themultiperiod excess earnings method of the income approach will be used to valuetechnology, in-process research and development, and the customer base. However,the other assets must be valued first (aside from goodwill, which is valued using aresidual method, where the value of all identified assets is subtracted from the totaladjusted purchase price). This is because in the multiperiod excess earnings method,there is a deduction representing returns or contributory charges on the fair values ofthe other assets employed in the business.REMAINING USEFUL LIFE ANALYSISIdentifiable assets must be analyzed to determine whether the asset has a finite orindefinite useful life. This subject is addressed in SFAS No. 142:The accounting for a recognized intangible asset is based on its useful life to thereporting entity. An intangible asset with a finite useful life is amortized; an intangibleasset with an indefinite useful life is not amortized. The useful life of an intangible assetto an entity is the period over which the asset is expected to contribute directly orindirectly to the future cash flows of that entity. 6SFAS No. 142 mentions several pertinent factors that should be taken into account: Expected use of the asset Expected use of similar assets Legal, regulatory, and contractual provisions that may limit the useful life orenable renewal or extension The effects of obsolescence, demand, competition, and other economic factors Required future maintenance expenditures 7Analysts often rely on management’s estimates of lives, decay rates, survivorship,etc. Analysts also rely on statistically based predictions of future behavior bydeveloping survivor curves sometimes using tools such as Iowa-type Curves andthe Weibull Distribution. The subject of ‘‘lifing’’ is very complex and beyond thescope of this book. There is no shortage of writings on the subject; for a start, tryChapter 1 of Valuing Intangible Assets by Robert F. Reilly and Robert P. Schweihs(New York: McGraw-Hill, 1999).In the following example, it is assumed that various analyses and techniques havebeen performed to determine the remaining useful lives of the amortizable intangible,but those complexities will not be described.BUSINESS ENTERPRISE ANALYSISOur analysis will proceed with the development of a business enterprise analysis(BEA) using a discounted cash flow (DCF) methodology. Performing a BEA using aDCF requires several assumptions, including sales and operating expense projections,
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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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Exhibit 4.8 Target Company Valuatio
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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