Valuation for Impairment Testing: The Finance and Accounting Professional's Guide to Valuing Reporting Units for Compliance with SFAS 142
Chandler, William F., The CPA Journal
VALUATION FOR IMPAIRMENT TESTING: THE FINANCE AND ACCOUNTING PROFESSIONAL'S GUIDE TO VALUING REPORTING UNITS FOR COMPLIANCE WITH WAS 142 By Travis W. Harms, CPA Andrew K Gibbs, CPA, and Matthew R. Crow, CFA, ASA, with contributions by Z. Christopher Mercer, CFA, ASA, and Owen T Johnson, CPA/ABV, ASA, CRA Peabody Publishing: $69. 00; Paperback, 125 pp.; ISBN, 0970069839 During the 1990s bull market, many companies recorded substantial goodwill resulting from acquisitions financed by the acquirer's own stock. When the bubble burst, such stock prices came falling down. But even though the value of the acquired goodwill has declined, the recorded value on the balance sheet can remain inflated for years if amortized over its finite life.
FASB addressed this issue in SFAS 142, Goodwill and Other Intangible Assets, which eliminated goodwill amortization for financial reporting purposes. Instead, acquired goodwill is to be tested annually to determine whether each reporting unit has been impaired.
The authors of this book provide timely guidance about how to comply with the valuation rules of SFAS 142, as well as practical guidance on selecting an impairment testing expert. Each chapter includes highlighted commentaries that enhance the material covered and provide helpful recommendations.Although the chapters that discuss the principles, methods, and techniques of business valuation are clearly presented, the book is written for professionals with prior experience.
The introduction discusses two fundamental valuation issues: the importance of defining the property interest to be valued and the steps included in the goodwill impairment test. The authors underscore that a clear definition of the property to be valued is essential in any valuation engagement and that the impairment test occurs at the reporting unit level. In determining the reporting unit, SFAS 142 allows aggregating economically similar components. The book does not illustrate how to define a reporting unit but underscores the importance of a proper definition at the outset. In one of its many helpful suggestions, it recommends that the analyst and the company clearly define the reporting unit before the engagement begins.
In addition to clearly defining the property interest to be valued, SFAS 142 requires a clear understanding of the appropriate definition of value. Chapter I compares and contrasts the SFAS 142 fair value standard with the fair market value standard. A helpful chart highlights three critical differences: First, the willing buyers and sellers under the fair market value standard are hypothetical parties but can be identifiable buyers and sellers under the SFAS 142 standard. Second, although each standard assumes that the seller is under no compulsion to sell, the SFAS 142 standard gives consideration to a buyer's compulsion to buy. Third, fair market value is based on financial returns to the buyer, but the fair value standard is more comparable to "investment value" to the current owners.
Chapter 1 continues to discuss the applicable level of value to be applied in an impairment test. It concludes that value is determined on a control interest basis, giving consideration to the internal synergies available to the owner to enhance cash flows. …