PCAOB s Annual Inspections Division Training

Transcription

1 Auditors, Valuation Specialists and Fair Value Measurements Mark L. Zyla CPA/ABV, CFA, ASA Acuitas, Inc. Objectives of the Presentation PCAOB s Annual Inspections Division Training March 11, 2010 Trends Toward Fair Value Measurement in Financial Reporting Where are we? An overview of Fair Value Accounting SFAS 157, Fair Value Measurement (ASC 820) Implementation issues in Topic 820 Fair Value Measurements and Disclosures ( SFAS 157) Implementation Issues for Topic 805 Business Combinations (SFAS 141(R)) Status of the Valuation Profession s Best Practices Valuation consideration for auditors The Trends Toward Fair Value Accounting The changing economic environment facing business today o The Information Revolution o Global competition o Wall Street expectations o Complexity of financial transactions Trend towards increasing regulation o Passage of Sarbanes Oxley Act in 2002 o The establishment of the PCAOB o The focus of the SEC on transparency The FASB and IASB Convergence Project ( Norwalk Agreement ) The implementation of Fair Value Accounting in US GAAP o Principles Based Accounting versus Rules Based Accounting For additional information see Fair Value Measurements: Practical Guidance and Implementation, John Wiley & Sons Fair Value Measurements: New Dynamic in Financial Reporting Preparers and Auditors trained in GAAP which is traditionally historical cost based system. Fair Value Measurements is based in large part on corporate finance theory. Fair Value Measurements of nonfinancial assets and liabilities often require some judgment. How does one audit judgment?

2 New dynamic has and is continuing to evolve. Roles of Various Parties in the FVM Management o Responsible for the preparation of the financial statements according to GAAP. o Conclusion of FVM is responsibility of management whether or not prepared internally or derived from an outside specialist. o Valuation methods and assumptions are appropriate. Valuation Specialist o Independent and objective in analysis and conclusions. o Provide sufficient audit evidence as to: Experience and expertise Valuation approaches and methods considered Assumption utilized Auditor o Sufficient evidence of reasonable assurance that the FVM is in conformity to GAAP. o Is the conclusion reasonable? o Utilize the outside specialists work as to audit evidence. o Utilize a valuation specialist as part of the audit team Definition of Fair Value Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation Approaches and Methods- Business Enterprise Value (Reporting Units) Cost Approach o Net Asset Value Market Approach o Guideline Transactions o Guideline Public Companies o Transactions of the Reporting Unit Income Approach o Discounted Cash Flow o Capitalization of Cash Flows o Option Pricing Methods Valuation Approaches and Methods- Intangible Assets Cost Approach o Reproduction Cost o Replacement Cost

3 Market Approach o Relief from Royalty o Guideline Transactions Income Approach o Multi-period Excess Earnings Method ( MPEEM) o Option Pricing Methods o Scenario Method ( With and Without ) o Greenfield Method o Profit Split Method Common General Fair Value Implementation Issues Large differences between income and market approaches in impairment testing. o Reconciliation to market capitalization. Identification of market participants and assumptions. Developing discount rates on a market participant basis. Comparison of the fair value indications from the cost approach and the income approaches. Consideration of EITF factors in impairment testing. Unit of account in impairment testing of long lived assets. In measuring the fair value of customer relationships, the sales and marketing expenses should reflect only obtaining new customers. Common Fair Value Measurement Issues: Cost Approach Reconciling the Cost Approach to the Income and Market Approaches o Opportunity Cost o Profit Incentives The quantification of obsolescence factors. Consideration of growth in the future. Value of intangible assets and goodwill in the net asset value method. Common Fair Value Measurement Issues: Market Approach Do the comparable guideline entitles and guideline transactions reflect market participant assumptions? Selection of multiples - judgment or use of some statistical analysis. Date of stock price used in calculating the multiple. Appropriateness of application of control premiums. Royalty rate selection. Lack of data for intangible assets. Common Fair Value Measurement Issues: Income Approach Forecasts prepared using market participant assumptions.

4 Discount rate assumptions. Inclusion of tax amortization benefits. Attrition rate assumptions in measuring the fair value of intangible assets. The attrition rate consider the useful life of the asset. No cross charges in MPEEM. Revenue and/or profit splits may be ok depending upon the facts and circumstances. The Acquisition Method Under Statement 141(R) (ASC 805), all business combinations will be accounted for by applying the acquisition method. Applying this method requires: Identifying the acquirer; Determining the acquisition date and purchase price; Recognizing at their acquisition-date fair values the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree; and Recognizing goodwill or, in the case of a bargain purchase, a gain. Fair Value Measurement Issues under The Acquisition Method The selection of the measurement date. Management is responsible for the identification of intangible assets. Comparison of the Weighted Average Cost of Capital ( WACC ) to the implied Internal Rate of Return ( IRR ) of the transaction. Preliminary discussion among management, the outside valuation specialist and the audit team. Comparison of the WACC to Weighted Average Return on Assets ( WARA ) FVM of contingent consideration ( earn outs ) o High degree of judgment; o Probability models Fair Value Measurement Issues under The Acquisition Method Valuation specialist should consider acquisition related documents o Investment Banking materials. o Board of Directors presentations o Press releases. o Acquisition process-auction. o Analysts reports Methodology and assumptions in measuring the fair value of IPR&D. Returns on specific assets should consider the ability to finance the individual asset with a combination of debt and equity.

5 Primary Assets fair value measured using the MPEEM. WARA approximates WACC. Valuation Profession Best Practices Update AICPA o Impairment Task Force o Equity as Compensation Task Force o IPR& D Task Force Appraisal Foundation s Best Practices Working Groups o Contributory Asset Charges o Customer List o Control Premium Valuation Profession Best Practices Update Valuation Resource Group of the FASB Appraisal Issues Task Force Training and Education o AICPA s Fair Value Measurement Conference Chicago June, 2010 o AICPA s Fair Value Measurements Workshop New York City, September, 2010 o ASA s Valuation of Intangible Assets for Financial Reporting Purposes (BV301) o AICPA courses Fair Value Accounting and Accounting for Goodwill and Other Intangible Assets Questions? Mark L. Zyla CPA/ABV, CFA, ASA Managing Director Acuitas, Inc. One Midtown Plaza, Suite 950 Atlanta, Georgia (404) Mzyla@acuitasinc.com