Valuation for Financial Reporting - CMA Ankur Pandey

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Objectives of Financial Reporting and the Current Environment 5verifications on the preparers’ financial reporting by following auditing standards orregulations. One commonly thinks of external users of financial information as existingand potential investors and creditors and their advisors. Management are also users oftheir financial information, but financial accounting standards place little focus onthese users because they have control over the underlying accounting records.When fair value measurements are necessary for financial reporting, preparersmay have valuation specialists on their staff or hire outside consultants to provide themeasurements. Auditors may rely on valuation specialists in their firms as technicalresources and reviewers in the audit process.More emphasis on fair value measurements in financial reporting provideopportunities for valuation specialists willing to study and become competent inthis area. Because this area involves GAAP, a background or understanding inaccounting and auditing can help the valuation specialist understand the meaningand implications of fair value accounting literature.Valuation specialists are being held to an increasingly higher level of performance.Many auditors are now familiar with best practices literature on fair value measurements,such as Assets Acquired in a Business Combination to be Used in Research andDevelopment Activities: A Focus on Software, Electronic Devices, and PharmaceuticalIndustries (New York: American Institute of Certified Public Accountants, 2001)(The IPR&D Practice Aid) and Valuation of Privately-Held-Company Equity SecuritiesIssued as Compensation (New York: American Institute of Certified PublicAccountants, 2004). Statement of Financial Accounting Standards, Fair ValueMeasurements, refers to the IPR&D Practice Aid ((SFAS) No. 157, footnote 10).Even though this practice aid was written for specific industries, many auditors nowview the procedures it describes as best practices across other industries.Many auditors now expect valuation specialists to analyze management’s keyassumptions underlying a financial forecast used to develop fair value measurements.The IPR&D Practice Aid recommends this step as one that should normally beperformed by the specialist. In addition, auditors may want valuation specialists toprovide alternative valuation methodologies to evaluate the reasonableness of fairvalue conclusions, such as creating a business enterprise analysis of an acquiredbusiness.As a result of stricter auditor independence rules and more scrutiny fromaccounting regulators, companies are frequently hiring valuation specialists to performfair value measurements required by GAAP. Most companies hire outsidevaluation specialists when they do not have internal resources to perform fair valuemeasurements. Auditors will perform their audit tests on the valuation work ofthe specialists, whether internal or external. These activities require new relationshipsand coordination among the preparers, auditors, and valuation specialists.Valuation specialists who were trained to perform analysis under fair market valuewill need additional education and experience if they are to successfully practice inthe world of fair value. First, they need to understand the nuances that differentiate fairvalue from fair market value. It is beyond the scope of this book to discuss the variousstandards of value, but there is ample published literature on the subject. Additionally,
6 Valuation for Financial Reportingvaluation practitioners need a thorough understanding of the relevant accountingliterature.Valuation specialists who enter this service line must be willing to work in anaccounting environment, which presents challenges above and beyond those found inthe theoretical valuation world. They must understand and use accounting standardsand best practices that apply to fair value measurements, be able to work with auditors,and stay current with the relevant accounting literature.STATEMENT OF FINANCIAL ACCOUNTING STANDARDSNO. 157, FAIR VALUE MEASUREMENTSThe FASB is the U.S. accounting standard setter for anyone reporting under GAAP. It isthe standard setter because the U.S. Securities and Exchange Commission effectivelyrecognizes the FASB for establishing GAAP applicable to publicly registered companies(subject to additional SEC requirements). Therefore, the fair value accountingliterature issued by the FASB is effectively a regulatory accounting standard.The FASB continues to move ahead with an agenda that includes fair valueaccounting. In 2006 it issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements to take affect for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscal years.SCOPESFAS No. 157 establishes a framework for making fair value measurements andrequires additional disclosures about the measurements. The pronouncement does notestablish any new areas in financial reporting where fair value accounting is required.Rather, it interacts with other accounting literature that requires or permits fair valuemeasurements—with some exceptions (paragraph 2). Appendix D of SFAS No. 157lists accounting pronouncements within the scope of the standard as of the issuancedate. It amends 28 Opinions, Statements, Interpretations, and other official pronouncementspreviously issued by accounting standard setters and applies to another39 pieces of accounting literature. Appendix 1.1 to this chapter lists the pronouncementsimpacted by SFAS No. 157. Appendix 1.2 lists the literature specificallyexcluded from application of SFAS No. 157.FAIR VALUESFAS No. 157 provides a single authoritative definition of fair value for financialreporting. It defines fair value as:Fair value is the price that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date. 7Fair value for financial reporting is one of five standards of value in the businessvaluation body of knowledge. The others are fair market value, investment value,intrinsic value, and fair value (under state statutes) in dissenting shareholder matters.
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210 IndexBusiness Enterprise Analys
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