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Dallas CPA Society 7 th Annual Education Conference. Valuation and the Audited Financial Statements. Presented by: Carla G. Glass, CFA, FASA May 26, 2011. Preview. Fair Value Accounting Requirements Valuation Fair Value in Financial Statements Purchase Price Allocations
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Dallas CPA Society 7th Annual Education Conference Valuation and the Audited Financial Statements Presented by: Carla G. Glass, CFA, FASA May 26, 2011
Preview • Fair Value Accounting Requirements • Valuation • Fair Value in Financial Statements • Purchase Price Allocations • Impairment Testing • Working with the Valuation Specialist • Future?
History and Change • Rules-Based vs Principles-Based • Cost-Based vs Value-Based
Fair Value • Many accounting requirements reference fair value measurements (ASC Topic 820): Defined as - 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 • Valuation expertise generally necessary • What Decides Acceptability? • Standards • Best Practices • Approaches, Methods and Techniques
Valuation • Valuation Standards • Multiple US-based Valuation Professional Organizations • The AICPA • The Appraisal Foundation • Licensing Laws (Real Estate only) • Non-US Valuation Standards
Valuation • Valuation and Accounting – Dialogue • Appraisal Issues Task Force • Valuation Resource Group of FASB • Valuation Fellows at • FASB • SEC
Valuation • Valuation Best Practices – Fair Value • AICPA Practice Aids • IPR&D • Shared-Based Compensation • Impairment • The Appraisal Foundation • Contributory Assets • Valuing Customer Relationships • Control Value (versus Minority Value) • Texts and Courses
Valuation • Approaches, Methods and Techniques • Three Approaches • Cost • Market • Income
Valuation • Intangible Assets • Trade Names • Patents/Technology • Customer Relationships • Income Approach Methods for Intangible Assets • Relief from Royalty • With and Without • Excess Earnings (MPEEM)
Fair Value in Financial Statements
Purchase Price Allocation • ASC Topic 805 – Business Combinations • ASC Topic 350 – Intangibles – Goodwill and Other Depreciated cost-based carrying amount restated to Fair Value
Purchase Price Allocation • Is purchase price Fair Value • Earnouts • Reporting Units • Allocated to Fair Value of each asset and liability • Specific intangible assets - key versus defensive • Amortizable versus indefinite-lived intangible assets • Other contingent liabilities
Purchase Price Allocation • Identifiable Intangible Assets • Contractual • Separable • Amortizable? • Valuable if Identifiable? • Interrelated nature • Goodwill • INTANGIBLES USUALLY NOT ON BALANCE SHEET IF ORGANIC GROWTH
Purchase Price Allocation • Organic versus Acquisition Growth • Organically – assets on balance sheet at cost, depreciated or amortized • Acquisitions – (ASC Topic 805) - assets on balance sheet at “allocated” cost (fair value), depreciated or amortized • Tangible asset net amount stepped up to fair value • Intangible assets put on balance sheet, including goodwill
Purchase Price Allocation In the end, do your WACC and WARA Reconcile?
PPA – Peculiar Results • Market Participant Assumptions • Synergies specific to the acquirer • Rational? • Market Inputs - Timing • Market inputs in agreed purchase price versus those at “measurement date”
Testing for Impairment • Impairment tests for indefinite lived assets (ASC Topic 350 Intangibles – Goodwill and Other) • Annually • More often if “events or changes in circumstances” indicate the “asset might be impaired” • Proposed Accounting Standards Update
Testing for Impairment • For Goodwill • Reporting Units • Two-step analysis • Step 1 – fair value of Reporting Unit • If fair value less than carrying amount – Step 2 • Step 2 – fair value of all assets • Note: Only goodwill value subject to change
Impairment – Peculiar Results • What’s More Important? • Stock market decline • Subject company earnings growth • What Constitutes Reporting Unit?
Testing for Impairment • For “long-lived” assets (ASC Topic 360 Property, Plant, and Equipment) • Test for impairment when “events or changes in circumstances” indicate the “carrying amount may not be recoverable” • Assets grouped to lowest level at which can identify independent cash flows
Testing for Impairment • For “long-lived” assets (ASC Topic 360) • Two-step analysis • Step 1 - undiscounted cash flows relative to carrying amount • If total less than carrying amount – Step 2 • Step 2 – fair value of assets
Working with the Valuation Specialist
Working With Valuation Specialist • Steps of valuation – typical • Select valuation specialist • Initial understanding - reporting entity, valuation specialist, and audit firm • Valuation specialist - data collection and analysis • Results reviewed with reporting entity • Reviewed with audit team • Securities & Exchange Commission?
Working With Valuation Specialist • Accounting, Audit, and Valuation • Learn common language • Opinionated specialist and opinionated reviewer • Audit firms without in-house valuation specialists • Very little is “typical” or “normal” • Keep track of • FASB and IASB documents and exposure drafts • Preferences of each major audit firm • Speeches by SEC staff • Valuation Standards and Best Practices
Working With Valuation Specialist • Access to appropriate parties • Sufficient overall view • Sufficient information about transaction • Specific information about individual asset • Key assumptions • Efficiencies • Be honest
Future? • Convergence with IFRS • Currently, relatively little industry-specific • Certain Priority Projects • Accounting for Impairment of Financial Assets • Fair Value Measurement (out by now?) • FASB and IASB • Chair changes • FASB Increased to 7-person Board – majority vote • IASB 14-person Board –super-majority vote
Future? • Equity versus Invested Capital Step One Test • ASU 2010-28 • Goodwill Impairment Testing • In future, might be based on “indications” rather than annually
HSSK Firm Profile Real Experts | Real Answers Hill Schwartz Spilker Keller LLC (HSSK) is a professional services firm devoted to Business Valuation, Litigation Consulting and Computer Forensics. The principals have been serving the corporate, legal and professional communities for over thirty years. Business Valuation The typical HSSK professional has over twenty years of business or industry experience, including considerable financial acumen. With expert business skills and exceptional valuation knowledge, we offer business valuation services to both public and privately owned companies for a variety of reasons including: Taxation Financial Reporting/Regulatory Compliance Economic Loss/Damages Dispute Resolution Transaction and financing Analysis Financial Restructuring Healthcare Industry Services The professionals at HSSK have performed thousands of healthcare valuation and litigation engagements involving a broad spectrum of businesses including: Hospitals Physician Practices Ambulatory Surgical Centers Imaging Centers Renal Centers Physician Compensation Various Outpatient Service Facilities Joint Ventures, Mergers and Acquisitions
HSSK Firm Profile (Cont.) Litigation Consulting HSSK's Litigation Consulting professionals have experience in a wide variety of disciplines and industries. Most have advanced degrees and certifications in areas such as accounting (CPA), fraud investigation (CFE) and financial forensics (CFF), business valuation (ASA), and electronic discovery (CCFE). They address the most complicated business litigation issues including matters relating to: Economic Damages Analysis Fraud Investigations and Detection Financial Forensics Professional Malpractice Minority Oppression and Shareholder Squeeze-outs Computer Forensics & E-Discovery Using state of the art technology and forensically sound tools and procedures, including maintaining the appropriate chain of custody (all evidence is stored in our biometrically controlled evidence store), we assist clients with electronic discovery and computer forensics services, throughout the world, including: E-Discovery Planning ESI Searching and Filtering Encryption Bypass Remote Forensic Imaging Forensic Acquisition of ESI Deleted File Recovery Spoliation Examinations Recreating Computer Use HSSK Houston is distinguished as operating the NATION’S FIRST private Computer Forensics lab accredited by the American Society of Crime Laboratory Directors/Laboratory Accreditation Board (ASCLD/LAB). This is not a CPA firm.
Carla G. Glass, CFA, FASA Experience: Carla Glass has over 25 years of experience in the valuation of businesses, intangible assets, partnerships, employee stock ownership plans (ESOPs), debt, and derivative securities in a wide range of industries. Her valuation expertise includes projects completed for financial reporting, gift and estate tax, corporate and partnership reorganizations, minority shareholder rights, bankruptcy proceedings, merger and acquisition analysis, and litigation, among others. Carla currently is one of nine valuation professionals serving on the Valuation Resource Group of the Financial Accounting Standards Board. She also has served as Chair of the Business Valuation Committee of the American Society of Appraisers (ASA) and also as Chair of the Appraisal Standards Board of The Appraisal Foundation, the Board that writes and promulgates the Uniform Standards of Professional Appraisal Practice (USPAP). Professional History: 2009 to Present: Valuation Managing Director, Hill Schwartz Spilker Keller LLC Professional services firm specializing in business valuation, litigation consulting, computer forensics, economic and strategic consulting services. September 1999 to February 2009: Vice President and Director, American Appraisal Associates Business valuation for the purpose of estate and gift tax reporting and employee stock ownership plans, intangible asset appraisals and multi-discipline appraisal projects primarily for financial reporting and tax purposes involving purchase price allocation and impairment testing, among others. Responsibilities at different times included managing director of Dallas region financial valuation practice and national leader of closely-held business valuation. October 1993 to August 1999: Vice President, Corporate Valuations, Inc. August 1989 to September 1993: Senior Manager, Ernst & Young
Carla G. Glass, CFA, FASA (Cont.) Professional Affiliations: 2001 - 2006: Member, Appraisal Standards Board of The Appraisal Foundation, Vice Chair 2004, Chair 2005 1998 - 2000: Member, CLARENCE Standards Committee (a cooperative effort of the five North American business valuation professional organizations) 1998 - 2000: Member, Standards Committee for Business Valuation, American Society of Appraisers 1990 - 1999: Member, Business Valuation Committee, American Society of Appraisers, Chair 1995-1997 1990 - 1998: Member, International Education Committee, American Society of Appraisers, Chair 1994-1995 1992 - 1994: Chair, Education Committee for Business Valuation, American Society of Appraisers 1991 - 1992: Chair, 11th Annual Advanced Business Valuation Conference, American Society of Appraisers Professional Honors: Named to American Society of Appraisers’ College of Fellows, which is awarded in recognition of exceptional appraisal proficiency as well as notable contributions to the valuation profession, 2005 Named to the Valuation Resource Group of the Financial Accounting Standards Board, one of eight valuation professionals nationwide Instructor of ASA Principles of Valuation Courses Accreditations & Licenses: Chartered Financial Analyst (CFA) Accredited Senior Appraiser (Fellow), American Society of Appraisers Education: BA, Vanderbilt University MBA, University of Houston, This is not a CPA firm
Thank You Carla G. Glass, CFA, FASA Managing Director Heritage Square II 5001 LBJ Freeway • Suite 300 Dallas, TX 75244-6120 214.741.5360 ext. 103 cglass@hssk.com www.hssk.com