I. OVERVIEW OF FIRMS. Table of Contents FAIR VALUE MEASUREMENTS AND FINANCIAL REPORTING UPDATE PRESENTATION TO DALLAS CPA SOCIETY.

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1 Table of Contents Overview of Firms 2 ASC 820: Fair Value Measurements and Disclosures 5 FAIR VALUE MEASUREMENTS AND FINANCIAL REPORTING UPDATE PRESENTATION TO DALLAS CPA SOCIETY MAY 4, 2012 ASC 805: Business Combinations 19 ASC 350: Intangibles Goodwill and Other 22 ASC 815: Embedded Derivatives 25 Auditing Fair Value Measurements 28 SEC Comments and PCAOB Reviews PAGE 1 Overview of PWC PwC provides assurance, tax and advisory services 158 countries with close to 169,000 people I. OVERVIEW OF FIRMS PwC US ranked among 100 Best Companies to Work For by Fortune Magazine $29.2 billion in gross revenues for FY ended June 2011 PwC s services contribute to the vibrancy and efficient functioning of the capital markets PAGE 2 PAGE 3 Overview of HFBE One of the Largest Independent Valuation and Financial Advisory Firms in the Southwest U.S. and International Client Base Credentialed Staff: Chartered Financial Analysts Accredited Senior Appraisers of the American Society of Appraisers Certified Public Accountants, Accredited in Business Valuation Registered Representatives and Registered Principals with FINRA II. ASC 820: FAIR VALUE MEASUREMENTS AND DISCLOSURES Registered Broker/Dealer HFBE Capital, L.P. HFBE provides professional, informed opinions of value in important situations. PAGE 4 PAGE 5

2 ASC 820 Fair Value Measurements and Disclosures Formerly SFAS 157 ASC 820 does the following: Defines fair value Sets out framework for measuring fair value Expands fair value disclosure requirements ASC 820 does not: Apply to share-based payment transactions (ASC 718) Apply to ASC 330, Inventory Eliminate the practicability exceptions to fair value measurements in other topics ASC 820 is not intended to establish valuation standards Definition of Fair Value 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 PAGE 6 PAGE 7 Price Amount market participant would receive to sell the asset or pay to transfer the liability (Exit Price). Entry price is the price paid to acquire the asset or transfer the liability in an exchange transaction. In many cases, the transaction price will equal the exit price. Examples of transactions where transaction price will not represent fair value Transaction between related parties Transaction occurs under duress (seller experiencing financial difficulties) Market in which transaction occurs different from market in which reporting entity would sell the asset or transfer the liability Fair Value Hierarchy Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, either of the following: a. The risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) b. The risk inherent in the inputs to the valuation technique. Input Elements Examples Level 1 Level 2 quoted prices active markets identical assets or liabilities accessible at the measurement date. other than Level 1 quoted prices observable, either directly or indirectly. Publicly trade shares of stock Publicly traded options Publicly traded debt Quoted prices for similar assets Quoted prices of identical assets in inactive markets Other observable inputs such as interest rate yield curves and inputs that are correlated to observable market inputs, A level 1 input becomes a level 2 input if it is adjusted in any way Level 3 unobservable inputs Cash flow projections Financial forecasts PAGE 8 PAGE 9 Recent Guidance In May 2011, the FASB issued Accounting Standards Update No , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs An Amendment of Accounting Standards Codification (Fair Value Measurement Topic 820) (the ASU ) The amendments to ASC 820 result from a joint project with the International Accounting Standards Board ( IASB ); the IASB issued IFRS 13, Fair Value Measurement concurrently with the ASU Objectives of the project included: Ensure that fair value has the same meaning in U.S. GAAP and International Financial Reporting Standards ( IFRS ) Promote convergence between U.S. GAAP and IFRS fair value measurement and disclosure guidance Much of the new guidance in the ASU, including the definition of fair value and the market participant concept, are similar to existing U.S. guidance; however there are some changes to the measurement guidance, and new disclosures have been added U.S. GAAP and IFRS are now substantially converged in this area, although there are some differences in measurement and disclosure requirements that remain PAGE 10 Effective Date and Transition The effective date under U.S. GAAP depends on whether the reporting entity is public or not: Public companies: interim and annual periods beginning after 12/15/2011 (first quarter 2012 for calendar year-end companies) Nonpublic companies: annual periods beginning after 12/15/2011 Transition: Prospective application with disclosure of impact of change Any changes resulting from applying the new measurement guidance should be reflected in the statement of comprehensive income as a change in estimate in the first period of application Early adoption is prohibited except that nonpublic companies can apply the same adoption date as public companies IFRS 13 is effective for annual periods beginning on or after January 1, 2013 Subsequent to the first year of adoption, the new measurement principles and certain disclosures will be required to be applied in interim and annual periods PAGE 11

3 What is not Changing? Scope ASC 820 does not address which assets, liabilities, and equity are required to be or can be measured at fair value addresses how to measure fair value Existing definition of fair value in ASC 820 is carried forward Use of market participant assumptions (not entity specific) remains a core principle Summary of Key Changes to U.S. GAAP The following areas are converged with IFRS: Area U.S. GAAP today New guidance: U.S. GAAP Principal market The principal market is the market where the reporting entity transacts with the greatest volume and level of activity for the asset The principal market is the market with the greatest volume and level of activity for the asset or liability Valuation approaches (i.e., market approach, income approach, cost approach) continue to be relevant Fair value hierarchy guidance carried forward Instruments classified within shareholders equity that are measured at fair value No guidance Measurement methodology should be consistent with that of measuring the fair value of liabilities Existing practical expedients / exceptions are carried forward, e.g.: Ability to use mid-market pricing in a bid ask spread Use of net asset value as fair value for certain alternative investments (U.S. GAAP only) Valuation premise: highest and best use Highest and best use is available for all assets Highest and best use is only relevant for nonfinancial assets New exceptions introduced for disclosures by nonpublic entities PAGE 12 PAGE 13 Summary of Key Changes to U.S. GAAP (continued) Summary of Key New Disclosures under U.S. GAAP The following changes to U.S. GAAP converge the guidance with IFRS: Area U.S. GAAP today New guidance: U.S. GAAP Measuring portfolios or groups of financial instruments Premiums and discounts in a fair value measurement, including blockage discounts Portfolios or groups of financial instruments may be measured at fair value using an in-use valuation premise Premiums and discounts applied when a market participant would include one Blockage discounts not permitted for Level 1 fair value measurements; permitted in Levels 2 and 3 Highest and best no longer available for financial instruments A new exception allows fair value of a portfolio or group of financial instruments to be measured based on the net position, in certain circumstances Incorporation of premiums and discounts not permitted when they relate to the size of a position Blockage discounts are not permitted for any level in the fair value hierarchy No adjustment permitted for items that would qualify as Level 1, except as permitted in the ASU Area Level 3 Disclosures Transfers Items disclosed by not measured at fair value Highest and best use New guidance: added disclosure requirements under U.S. GAAP All Level 3 measurements: quantitative information about significant unobservable inputs and a description of valuation processes Recurring Level 3 measurements: qualitative discussion about sensitivity of unobservable inputs if significant to the measurement (exception provided when the inputs are not developed by the reporting entity; e.g., third party pricing information without adjustment) Any transfers between Level 1 and Level 2 fair value measurements, including the reason why, must be disclosed Disclosure of the level in the fair value hierarchy is required for assets, liabilities and equity items disclosed at fair value but not recorded at fair value on the statement of financial position If highest and best of a nonfinancial asset that is recorded or disclosed at fair value differs from its use by the entity, that fact and why must be disclosed U.S. GAAP and IFRS converged? A quantitative sensitivity analysis is required for financial instruments under IFRS only PAGE 14 PAGE 15 Exceptions for Nonpublic Entities - Disclosures No exceptions to the measurement principles have been provided to nonpublic entities However, the amendments to ASC 820 provide that nonpublic entities are exempt from disclosing the following new disclosures: The qualitative discussion about the sensitivity of recurring Level 3 fair value measurements Transfers of fair value measurements between Level 1 and Level 2 of the fair value hierarchy Any of the new disclosures pertaining to fair value measurements if fair values are not reported as the measurement basis on the balance sheet, but are only disclosed (e.g., disclosing the fair value of long term debt which is recorded on the balance sheet at amortized cost) These exceptions are only applicable for entities that report under U.S. GAAP FASB has a new project on its agenda to determine whether existing Level 3 fair value disclosures for nonpublic entities can be reduced; exposure draft expected first half of 2012 Remaining Differences Between U.S. GAAP and IFRS Day one gains and losses Under IFRS (e.g., IAS 39, IFRS 9), day one gains and losses can only be recognized to the extent that the fair value is based on observable pricing this is different from U.S. GAAP which requires that day one gains and losses be recognized when present in a fair value measurement The IASB decided not to address this difference as part of the fair value measurements project and may consider at a future date Fair value of investments in investment company entities U.S. GAAP provides a practical expedient for the measurement of fair value of certain investments that report a net asset value (NAV), to allow use of NAV as fair value The IASB decided not to issue similar guidance because: - IFRS does not contain accounting requirements specific to investment companies - NAV is not defined in IFRS and its definition can vary in different parts of the world PAGE 16 PAGE 17

4 Improving Disclosures about Fair Value Measurements Amendments to ASC 820 (FAS 157): Improve transparency, particularly for Level 3 measurements Promote convergence with IFRS 7, Financial Instruments: Disclosures Additional required disclosures and clarifications to existing requirements include: Effective for 2010 financial reporting (periods beginning after December 15, 2009 including interim periods): Details of significant transfers in and out of Level 1 and Level 2 measurements Additional disaggregation of fair value measurements (at the class level) Disclosures regarding inputs and valuation techniques New for 2011 (periods beginning after December 15, 2010 including interim periods): Gross presentation of activity within the Level 3 roll forward Present purchases, issuances, sales, settlements and transfers on a gross basis (derivatives activity can continue to be presented net) III. ASC 805: BUSINESS COMBINATIONS PAGE 18 PAGE 19 Primary Concepts Formerly FASB Statement No.141(R) Recognition Principle: The acquirer recognizes all of the assets acquired and all of the liabilities assumed Measurement Principle: The acquirer measures each recognized asset acquired and each liability assumed and any noncontrolling interest at its acquisition date fair value Summary of Differences Between SFAS 141 and ASC 805 Measurement Date Issue SFAS 141 ASC 805 Impact Contingent Consideration Reasonable period of time before and after terms are agreed to and announced Fair value at acquisition date (date take effective control) Recorded when contingency is resolved and Measure fair value at acquisition date consideration is issued or issuable Record as liability when incurred Remeasure in subsequent period Changes recorded to P&L Income Statement/ Transaction Costs Capitalized as cost of acquisition Expensed as incurred Selling & exiting costs Capitalize as cost of acquisition if certain criteria are met Expense as incurred Income Statement/ Pre-acquisition contingencies Fair value during allocation period, or follow FAS 5; no re-measurement Fair value at acquisition date if determinable; (i e. contractual or more likely than not) In-Process R&D Acquisition of < 100% Negative Goodwill Measured at fair value Expensed on acquisition date Record minority interest at historical cost Pro-rata reduction of certain non-monetary assets Measured at fair value Capitalized as an intangible asset Indefinite life until complete or abandoned Full step up to fair value (Record 100% of goodwill) Record as gain Changes in deferred taxes Recorded as adjustments to goodwill Recorded as a a tax expense / / PAGE 20 PAGE 21 Primary Concepts IV. ASC 350: INTANGIBLES GOODWILL AND OTHER Formerly FASB Statement No. 142 Provides guidance on financial accounting and reporting for goodwill and other intangibles other than the accounting for such assets at acquisition Goodwill instead tested for impairment at reporting unit level Step 0 Qualitative assessment of factors that may impact goodwill Step 1 Compare fair value of reporting unit to its carrying amount, including goodwill If fair value > carrying amount, goodwill is not impaired If fair value < carrying amount, perform step 2 to measure amount of impairment Step 2 Impairment amount equals carrying amount of goodwill minus implied fair value of goodwill PAGE 22 PAGE 23

5 When to Test Goodwill for Impairment Tested annually or if triggering event indicating more likely than not that goodwill is impaired. A significant adverse change in legal factors or in the business climate An adverse action or assessment by a regulator Unanticipated competition A loss of key personnel A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic of a significant asset group within a reporting unit Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. V. ASC 815 EMBEDDED DERIVATIVES If goodwill and another asset are to be tested for impairment, must perform impairment test of other asset before performing impairment test of goodwill. If such asset is impaired, must recognize the asset s impairment loss before testing for impairment of goodwill. PAGE 24 PAGE 25 Embedded Derivatives Test for Embedded Derivative Embedded = part of a larger contract Report separately if Economic characteristics and risks of derivative not closely related to companion instrument (thus excluding call option in bond contract) Companion instrument not reported at fair value As a separate contract would qualify as a Derivative Examples Structured notes Convertible securities (other then straight convertible debt) Securities with caps, floors, or collars Is the contract carried at fair value through earnings? No Would it be a derivative if it was freestanding? Yes Is it clearly and closely related to the host contract? Yes No Yes Do Not Apply ASC 815 No Apply ASC 815 PAGE 26 PAGE 27 Auditing Standards SAS 57 (AU 342) Auditing Accounting Estimates Auditor s responsibility Evaluate the reasonableness of accounting estimates made by management Obtain sufficient corroborating audit evidence VI. AUDITING FAIR VALUE MEASUREMENTS SAS 73 (AU 336) Using the Work of a Specialist Auditor should Understand the methods and assumptions used by the specialist; Make appropriate tests of data; Evaluate whether the findings support assertions in financial statements Auditor should evaluate the competency and objectivity of the specialist PAGE 28 PAGE 29

6 Auditing Standards (cont d) SAS 101 (AU 328) Auditing Fair Value Measurements and Disclosures Auditor evaluates whether management s: Assumptions are reasonable Fair value measurements determined using an appropriate model Relevant information was reasonably available at the time PCAOB Auditing Standard No.3 Audit Documentation Auditor documents Procedures performed, Evidence obtained and Conclusions reached regarding fair value assertions VII. SEC COMMENTS AND PCAOB REVIEWS PAGE 30 PAGE 31 Frequent Comments in PCAOB Letters Failure to test or inadequate testing of Reasonableness of management s assumptions Changes in assumptions from one period to the next Reliability of previous forecasts and assumptions Underlying data Valuation method Failure to assess reasonableness of Issuer s use of value estimate that is significantly higher than market capitalization Issuer s exclusion of significant assets Amount recorded by that issuer was significantly different than the amount estimated by the issuer s valuation specialist Issuer s determination no impairment of goodwill when issuer s market capitalization was less than its book value Implied control premium when comparing aggregate value of reporting units to fair value of issuer SEC Staff Focus Valuations Area of intense focus (financial and non-financial assets/liabilities) Variables, estimates, judgments, sensitivities Goodwill and intangible assets Comments ask for disclosure at reporting unit level What does an impairment reflect about the business? Foreshadowing Reconciliation between fair value of reporting units and issuer s market capitalization Control premiums Indicators of impairment Market capitalization less than book value Change in business environment Inconsistency between public statements and analysis Embedded derivatives Whether considered need to bifurcate the conversion option as a derivative Whether convertible debt is a conventional convertible debt instrument. Specific information about the terms and features of the convertible security Whether embedded feature is clearly and closely related to the host contract PAGE 32 PAGE 33 Issues Frequently Raised in Comment Letters Management s Discussion & Analysis Reverse Mergers & Back Door Registrations Business Combinations Goodwill, Intangible and Long-Lived Assets Predecessor Financial Statements Equity Transactions Embedded Conversion Options and Freestanding Warrants Revenue Recognition Smaller Reporting Company Status Disclosure Controls and Procedures Internal Control over Financial Reporting Form 8-K QUESTIONS? Source: SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers, 2010 Forums on Auditing in the Small Business Environment PAGE 34 PAGE 35

7 Contact Information Charlie Adams Shishir R. Khetan PwC HFBE PAGE 36