Accounting Standards Update No

Transcription

1 Accounting Standards Update No Mayer Hoffman McCann P.C. Keith C. Peterka CBIZ Valuation Group, LLC Rick Jenson Greg Watts

2 Agenda Objectives Background - Accounting Standards Codification Topic 350, Intangibles- Goodwill and Other (ASC 350) Amendment of ASC Accounting Standards Update No , (ASU ) Qualitative Assessment Illustration FASB Rationale Examples Events and Circumstances Entities with Negative Equity Implementation Guidance Case Study Wrap-up / Q&A 2

3 Objectives

4 Objectives Provide an overview of ASU Understand the impact of the new ASU from a valuation/implementation perspective Learn about the new qualitative guidance Discuss tips for preparers wishing to utilize the new ASU 4

5 Background

6 ASC 350 Pursuant to accounting rules under ASC Subtopic , goodwill and certain intangibles are not amortized; rather, these assets must be periodically tested for impairment Two Step ASC 350 Impairment Test Step 1 The Step One impairment test compares the fair value of a reporting unit to its carrying value. If the fair value exceeds carrying value there is no goodwill impairment and the test is complete. If not, impairment is indicated, requiring a Step Two impairment test. Step 2 The Step Two test, which is similar to an allocation of purchase price performed pursuant to ASC 805, calls for comparing the fair values of a reporting unit s assets to their carrying values and quantifies the amount of goodwill impairment. 6

7 Amendment of ASC 350

8 Amendment of ASC 350 In September 2011, FASB issued Accounting Standards Update No (ASU ), an amendment of ASC 350. FASB s intention in issuing ASC was to simplify how public and nonpublic entities test goodwill for impairment. The qualitative assessment permitted under ASU is commonly being referred to as Step 0 by many practitioners The amendment will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, Early adoption is permitted. Amends the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not (that is, a likelihood of more than 50 percent), that the fair value of a reporting unit is less than its carrying amount 8

9 Amendment of ASC 350 (continued) An entity may resume performing the qualitative assessment in any subsequent period Allows companies an unconditional option to skip the optional qualitative assessment and continue applying the existing two-step test Requires no new disclosures Observations Provides no comprehensive examples of how an entity concludes whether or not a quantitative analysis is required Can bypass Step O and go directly to Step 1 Indefinite Lived Assets Still required to analyze these assets prior to Step O /Step 1 FASB is expected to address these assets soon 9

10 Qualitative Assessment Illustration

11 Qualitative Assessment Is it more likely than not FV < CV No No Stop Yes No Step 1 Is the FV of E < CV of E Yes Step 2 Is implied FV of GW < CV of GW Yes FV = Fair Value CV = Carrying Value GW = Goodwill E = Entity 11 Recognize Goodwill Impairment

12 FASB Rationale

13 FASB Rationale ASU Addresses private companies concerns about the cost and complexity of the goodwill impairment test Simplifies how entities, both public and nonpublic, test goodwill for impairment Improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairmenti testst in determining i whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount Improves the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test 13

14 Examples Events and Circumstances

15 Examples Events and Circumstances Description Macroeconomics Industry & market conditions Cost/expense factors Financial performance Examples General economic conditions, access to capital, general debt and equity market conditions, FX issues Entity environment, changes in multiples and metrics, product/service demand issues, regulatory or political developments Materials, labor and other factors impacting earnings Cash flow trends, variance analysis over relevant periods Company-specific events Changes in management, key personnel, strategy, loss of customers, pending bankruptcy of litigation Reporting-unit it specific events Change in composition or carrying values of assets, asset group or subsidiary changes, disposal of a portion of a reporting unit Capital market pricing Sustained decrease in share price (both in absolute and relative to peers) Fair value issues While a carryover of a fair value is no longer permitted, the consideration of a fair value cushion is

16 Entities with Negative Equity

17 Reporting Units with Negative Equity Perform qualitative assessment If it is more likely than not that impairment is present, proceed to Step 2 Differences in ASC : Consider list of events in the ASU as opposed to A. Consider whether there are differences between carrying values and the potential fair values of: Assets Liabilities Unrecognized intangible assets 17

18 Implementation Guidance

19 Implementation Guidance Determine/identify key assessment factors for each reporting unit While the process is deemed qualitative, many of the assessment factors are quantitative Remember that factors other than those listed in the ASU may be relevant Consider factors used in a typical fair value determination ti as well Develop and collect key market-based metrics Capital market pricing for comparable companies (relative pricing) and equity market capitalization, if public (absolute pricing) Changes in valuation metric over measurement period Establish process to measure, compare and identify changes in key factors in subsequent periods Actual vs budgeted results Changes in key performance metrics Changes in external environment economy and industry 19

20 Implementation Guidance (continued) Compile/document the positive, negative and mitigating events and factors in subsequent periods Prepare a presentation or matrix of factors considered, their effects on the assessment and their relative weights Documentation of the process and the presentation of the results will be key components of a success Qualitative Assessment 20

21 Case Study

22 Conclusion Fair Prior test Carrying Prior test Current carrying value Decline to fail Valuation Comparison $ 65,000 $ 52,000 $ 50, % Preliminary Contributory Change in Value (see below) % Change Weight Weighted % Change Income Approach - Discounted Cash Flow Method -4.4% 50% -2.2% Market Approach - Guideline Public Company Method 17.9% 25% 4.5% Market Approach - Mergers and Acquisitions Method -5.0% 25% -1.2% Preliminary change in fair value 1.0% Qualititative Factors Considered Macroeconomic and industry conditions would appear to have a neutral effect on fair value. Reporting Unit specific factors would appear to have a neutral effect on fair value. General valuation trends have risen based on the guideline public company, which would be a positive effect on fair value. Relative profitability of Reporting Unit remains below the median on the guideline companies, but above the transaction targets, which would be a neutral effect on fair value. Given that the potential change in fair value does not exceed the decline to fail metric, and that there are no negative qualititative factors that need to be considered, it is our opinion that: Is ASC 350 Step 1 required (more likely than not that carrying value exceeds fair value)? NO 22

23 Income Approach Discount rate Prior test Current value % change Average SIC Composite WACC 11.0% 10.5% -4.5% SIC Composite WACC + Size 13.0% 12.5% -3.8% 42% 4.2% Forecast FY11 vs. Trending FY11 Original forecast FY2011 Current FY2011 % change Revenue $ 33,000,000 $ 31,000, % EBITDA (1) Actual 9,000,000 8,000, % -8.6% Estimated contributory change in value -4.4% Market Approaches Guideline Public Company Method Prior test Current test % change Average Revenue metric $ 28,000,000 $ 30,600, % EBITDA metric 6,700,000 7,500, % 10.6% Revenue multiple % EBITDA multiple % 7.3% Estimated contributory change in value 17.9% Mergers and acquisitions method Prior test Current test % change Average Revenue metric $ 28,000,000 $ 30,600, % 9.3% EBITDA metric 6,700,000 7,500, % 10.6% Revenue multiple % EBITDA multiple % -15.6% Estimated contributory change in value -5.0% Notes: (1) As provided by Management. To the extent that Management believes that current EBITDA is not representative of the Reporting Unit's going forward performance, Management provided a pro forma EBITDA estimate. The basis for the pro forma estimate is provided separately. 23

24 Other Qualitative Factors Macroeconomic Prior test Current test Economic growth 2.5% 2.0% (this represents annualized testing date) Unemployment rate 9.5% 9.0% (as of the end of testing date) Inflation rate -0.1% -0.2% (annualized trailing twelve month period) Stock market (S&P) 15.0% 30.0% (for the trailing twelve month period) Interest rates 3.0% 3.2% 10-year treasury note Industry Expected industry growth Expected revenue growth (5-year CAGR) remained fairly constant from the prior analysis (11.0%) to the current analysis (12.0%). Margin expectation EBIT margins were expected to grow over the next five years from 18.0% to 19.7%. Reporting Unit Specific What is Management's opinion of the following factors and how they influence fair value? Competitive environment? The competitive environment has remained unchanged from the prior analysis. Change in operations? There has been no change in operations. Change in products/services? There has been no change in service offerings. Change in Management? There has been some change in Management, but there has been no decline in its strength. Significant customer attrition? There has been no loss of major customers. Access to capital markets? There have been no limitations on access to capital. Guideline Public Company Valuation Comparison Market Capitalization Comp #1 Comp #2 Comp #3 Comp #4 Comp #5 Comp #6 Average Current test 70 9,700 3, ,300 Prior test 50 7,900 3, ,000 % increase 40.0% 22.8% 9.1% -3.2% 11.1% 3.3% 13.8% Market Value of Invested Capital Current test 80 11,700 3, ,600 Prior test 60 9,200 3, ,100 % increase 33.3% 27.2% 12.1% -4.5% 11.1% 12.4% 15.3% Relative EBITDA margins Guideline Company Transactions Reporting Unit Industry Median Industry Median Prior test EBITDA Margin 23.9% 19.0% 3.0% Current test EBITDA Margin 24.5% 17.5% 5.5% FY2011 EBITDA Margin 25.8% 16.0% NA Management's support for trailing and future performance : Trailing and future revenue growth and EBITDA margins provided by Management separately. 24

25 Conclusion Fair Prior test Carrying Prior test Current carrying value Decline to fail Valuation Comparison $ 6,000 $ ,900 $ 4, % Preliminary Contributory Change in Value (see below) % Change Weight Weighted % Change Income Approach - Discounted Cash Flow Method -49.4% 50% -24.7% Market Approach - Guideline Public Company Method 8.9% 25% 2.2% Market Approach - Mergers and Acquisitions Method -13.9% 25% -3.5% Preliminary change in fair value -26.0% Qualititative Factors Considered (see Exhibit C-2) Macroeconomic and industry conditions would appear to have a neutral effect on fair value. Reporting Unit specific factors would appear to have a neutral effect on fair value. General valuation trends have risen based on the guideline public company, which would be a positive effect on fair value. The valuation of this Reporting Unit has previously relied upon forward market multiples and metrics. We note that forward multiples have increased from 1.4x and 6.9x to 1.7x and 8.2x. Relative e profitability of Reporting Unit remains below the median on the guideline companies and transaction targets, which would be a neutral effect on fair value. Given that the potential change in fair value approximates the decline to fail metric, some detail on Management's expecation for future revenue and EBITDA would be helpful to reach a definitive conclusion. While the other qualitative factors considered do not appear to have a negative effect on fair value, it is our option that: Is ASC 350 Step 1 required (more likely than not that carrying value exceeds fair value)? 25 YES

26 Income Approach Discount rate Prior test Current value % change Average SIC Composite WACC 11.0% 10.5% -4.5% SIC Composite WACC + Size 13.0% 12.5% -3.8% 42% 4.2% Forecast FY11 vs. Trending FY11 Original forecast FY2011 Current FY2011 % change Revenue $ 4,500,000 $ 4,700, % EBITDA (1) Actual 300,000 (35,000) % -53.6% Estimated contributory change in value -49.4% Market Approaches Guideline Public Company Method Prior test Current test % change Average Revenue metric $ 3,000,000 $ 4,000, % EBITDA metric (500,000) (350,000) -30.0% 1.7% Revenue multiple % EBITDA multiple % 7.3% Estimated contributory change in value 8.9% Mergers and acquisitions method Prior test Current test % change Average Revenue metric $ 3,000,000 $ 4,000, % 3% EBITDA metric (500,000) (350,000) -30.0% 1.7% Revenue multiple % EBITDA multiple % -15.6% Estimated contributory change in value -13.9% Notes: (1) As provided by Management. To the extent that Management believes that current EBITDA is not representative of the Reporting Unit's going forward performance, Management provided a pro forma EBITDA estimate. The basis for the pro forma estimate is provided separately. 26

27 Other Qualitative Factors Macroeconomic Prior test Current test Economic growth 2.5% 2.0% (this represents annualized testing date) Unemployment rate 9.5% 9.0% (as of the end of testing date) Iflti Inflation rate -0.1% 01% -0.2% 02% (annualized trailing twelve month period) Stock market (S&P) 15.0% 30.0% (for the trailing twelve month period) Interest rates 3.0% 3.2% 10-year treasury note Industry Expected industry growth Expected revenue growth (5-year CAGR) remained fairly constant from the prior analysis (11.0%) to the current analysis (12.0%). Margin expectation EBIT margins were expected to grow over the next five years from 18.0% to 19.7%. Reporting Unit Specific What is Management's opinion of the following factors and how they influence fair value? Competitive environment? The competitive environment has remained unchanged from the prior analysis. Change in operations? There has been no change in operations. Change in products/services? There has been no change in service offerings. Change in Management? There has been some change in Management, but there has been no decline in its strength. Significant customer attrition? There has been no loss of major customers. Access to capital markets? There have been no limitations on access to capital. Guideline Public Company Valuation Comparison Market Capitalization Comp #1 Comp #2 Comp #3 Comp #4 Comp #5 Comp #6 Average Current test 70 9,700 3, ,300 Prior test 50 7,900 3, ,000 % increase 40.0% 22.8% 9.1% -3.2% 11.1% 3.3% 13.8% Market Value of Invested Capital Current test t 80 11,700 3, ,600 Prior test 60 9,200 3, ,100 % increase 33.3% 27.2% 12.1% -4.5% 11.1% 12.4% 15.3% Relative EBITDA margins Guideline Company Transactions Reporting Unit Industry Median Industry Median Prior test EBITDA Margin -16.7% 19.0% 3.0% Current test EBITDA Margin -8.8% 17.5% 5.5% FY2011 EBITDA Margin -0.7% 16.0% NA Management's support for trailing and future performance : Trailing and future revenue growth and EBITDA margins provided by Management separately. 27

28 Wrap-up p / Q & A

29 Contact Information CBIZ Valuation Group LLC Valuation, Financial Advisory & Litigation Support Managing Director 4851 LBJ Freeway, Suite 800 Dallas, TX Direct Fax Rick A. Jenson Mayer Hoffman McCann P.C. Director 401 Plymouth Road; Suite 200 Plymouth Meeting, PA kpeterka@cbiz.com Direct Fax Keith C. Peterka Greg Watts CBIZ Valuation Group LLC Valuation, Financial Advisory & Litigation Support Managing Director 1009 Lenox Drive, Suite 105 Lawrenceville, NJ gwatts@cbiz.comcom Direct Fax 29