The Joint 14 th Annual PBFEA and 2006 Annual FeAT Conference U.S. Financial Accounting Valuation
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July 2006 © Copyright 2006. # ! E The Joint 14 th Annual PBFEA and 2006 Annual FeAT Conference U.S. Financial Accounting Valuation Michael W. Tully, CFA, ASA Los Angeles, CA TAS – Valuation and Business Modeling Transaction Advisory Servic
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Transaction Advisory Services. The Joint 14 th Annual PBFEA and 2006 Annual FeAT Conference U.S. Financial Accounting Valuation. Michael W. Tully, CFA, ASA Los Angeles, CA TAS – Valuation and Business Modeling. Agenda. Fair Value Accounting – US GAAP - PowerPoint PPT Presentation
Transcript of The Joint 14 th Annual PBFEA and 2006 Annual FeAT Conference U.S. Financial Accounting Valuation
July 2006
© Copyright 2006.#! E
The Joint 14th Annual PBFEA and 2006 Annual FeAT Conference
U.S. Financial Accounting Valuation
The Joint 14th Annual PBFEA and 2006 Annual FeAT Conference
U.S. Financial Accounting Valuation
Michael W. Tully, CFA, ASALos Angeles, CA
TAS – Valuation and Business Modeling
Michael W. Tully, CFA, ASALos Angeles, CA
TAS – Valuation and Business Modeling
Transaction Advisory Services
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AgendaAgenda
Fair Value Accounting – US GAAP
Valuation Analysis of Intangible Assets - Methodology
SEC Areas of Concern
Fair Value Accounting – US GAAP
Valuation Analysis of Intangible Assets - Methodology
SEC Areas of Concern
July 2006
© Copyright 2006.#! E
Fair Value AccountingFair Value Accounting
Basics of SFAS 141/142Basics of SFAS 141/142
SFAS 141SFAS 141 All business combination transactions must follow purchase
accounting (i.e. pooling is gone)
Intangible assets are recorded apart from goodwill
Much clearer guidance of what constitutes an intangible asset for GAAP purposes (paragraph 39)
– Legal/contractual
– Separable
Detailed listing of potential intangible assets provided
– Appendix A, paragraph A14 (see next page)
Significantly increases the disclosure requirements about Business Combinations
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Basics of SFAS 141/142 (cont’d) Intangible Assets Recognized as Assets Apart from Goodwill Intangible Assets Recognized as Assets Apart from Goodwill
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Basics of SFAS 141/142 (cont’d) Intangible Assets Recognized as Assets Apart from Goodwill Intangible Assets Recognized as Assets Apart from Goodwill
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• Marketing-related– Trademarks, trade names,
service marks– Non-compete agreements– Internet domain names
• Customer-related– Customer lists– Backlog– Customer contracts– Noncontractual relationships
• Artistic-related– Plays, operas, ballets– Books, magazines, newspapers– Musical works– Video, including motion pictures
and TV programs– Pictures, photographs
• Contract-based– Licensing, royalty agreements– Franchise or lease agreements– Employment contracts– Use rights– Construction permits– Service or supply contracts– Operating and broadcast rights
• Technology-based– Patented and unpatented
technology– Databases– Trade secrets (such as secret
formulas, processes and recipes)– Computer software
1 SFAS 141, Appendix A paragraph A14
Basics of SFAS 141/142 (cont’d)Basics of SFAS 141/142 (cont’d)
SFAS 142SFAS 142 Eliminates amortization of goodwill and introduces an impairment-only approach Introduces the concept of a reporting unit and the need to assign assets and liabilities including all goodwill to
reporting units Creates a two-step process for the transitional, annual & interim testing and measurement of goodwill
impairment– Step 1 – essentially a business valuation and comparison of reporting unit fair value to carrying value– Step 2 – essentially a “deemed” purchase price allocation requiring asset valuations to conclude on
current fair value of goodwill
Basics of SFAS 141/142 (cont’d)Basics of SFAS 141/142 (cont’d)
SFAS 142SFAS 142 Eliminates 40 year maximum life on intangibles Creates a new class of “indefinite lived” intangibles with a need for
transitional, annual & interim fair value – based impairment testing and measurement
Requires finite lived intangible assets to be amortized using a method that reflects pattern in which the economic benefits of the intangible asset is consumed or otherwise used up
Adds to disclosures previously required: – Information about changes in the carrying value of goodwill
– Carrying amount of intangible assets by major intangible asset class for those subject to amortization and those not subject to amortization
– Estimated expense related to intangible assets for the next five years
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Basics of SFAS 141/142 (cont’d) Basics of SFAS 141/142 (cont’d)
Adoption Process – SFAS 142Adoption Process – SFAS 142
DefineReporting Units (RU)
DefineReporting Units (RU)
Assign Assets & Liabilities
Incl. GWTo RU
Assign Assets & Liabilities
Incl. GWTo RU
PerformStep 1: Test
(Business valuationcomparison to carrying value)
PerformStep 1: Test
(Business valuationcomparison to carrying value)
FinishNo Further
ActionNecessary
FinishNo Further
ActionNecessary
PerformStep 2:
Measurement(Deemed purchase
price allocationto RU Fair Value)
PerformStep 2:
Measurement(Deemed purchase
price allocationto RU Fair Value)
FinishWrite Off
GW IfIndicated
(Carrying amountof GW exceeds
current Fair Value)
FinishWrite Off
GW IfIndicated
(Carrying amountof GW exceeds
current Fair Value)
StartStart
PassPass
FailFail
Analyze Existing Goodwill (GW) and Intangible
Assets
Analyze Existing Goodwill (GW) and Intangible
Assets
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Valuation Analysis of Intangible Assets - Methodology
Valuation Analysis of Intangible Assets - Methodology
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Methodology Framework:Intangible Asset ValuationMethodology Framework:Intangible Asset Valuation
Relief From Royalty Method
Incremental or Differential Method
Cost ApproachMarket ApproachIncome Approach
Replacement or Reproduction Cost Method
Similar Transactions Method
Multi-Period Excess Earnings Method
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Multi-Period Excess Earnings MethodMulti-Period Excess Earnings Method
The principle behind the Multi-Period Excess Earnings Method is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
The principle behind the Multi-Period Excess Earnings Method is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
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Relief from Royalty MethodRelief from Royalty Method
The basic tenet of the Relief from Royalty Method is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
The basic tenet of the Relief from Royalty Method is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
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Incremental or Differential MethodIncremental or Differential Method
Depending on the fact pattern surrounding the valuation of the subject intangible asset, its value may be determined by isolating incremental cash flows generated by cost savings or by pricing premiums. These incremental cash flows are a direct measure of the benefits derived from ownership of the intangible asset and would serve as the basis for an estimate of the value of the subject intangible asset.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
Depending on the fact pattern surrounding the valuation of the subject intangible asset, its value may be determined by isolating incremental cash flows generated by cost savings or by pricing premiums. These incremental cash flows are a direct measure of the benefits derived from ownership of the intangible asset and would serve as the basis for an estimate of the value of the subject intangible asset.
Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to Estimating Fair Value of Assets Acquired—General Discussion”)
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Commonly Identified Intangible Assets:Summary of Primary Valuation MethodologyCommonly Identified Intangible Assets:Summary of Primary Valuation Methodology
Intangible Asset Primary Valuation Approach Primary Valuation Method
Technology Income Approach Multi-Period Excess Earnings
Customer Relationships Income Approach Multi-Period Excess Earnings
Trademarks Income Approach Relief from Royalty
Patents Income Approach Relief from Royalty
Covenant not to Compete Income Approach Differential Method
Assembled Workforce Cost Approach Cost to Re-Create
Goodwill Residual Not Applicable
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SEC Areas of Concern on Fair Value MeasurementsSEC Areas of Concern on Fair Value Measurements
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SEC Areas of ConcernSEC Areas of Concern
Primary perspectives and source of questions Is the registrant following the published guidance (“following the rules”)?
What is the registrant’s potential bias?
Process for identifying intangible assets Ensuring that all intangible assets apart from goodwill were identified and
considered to be valued
What was valued? What was not valued?
Valuation methodology Expected (“standard”) approaches, methods
Use of the residual approach to valuation
Use of the word “residual” in any context other than describing goodwill
Primary perspectives and source of questions Is the registrant following the published guidance (“following the rules”)?
What is the registrant’s potential bias?
Process for identifying intangible assets Ensuring that all intangible assets apart from goodwill were identified and
considered to be valued
What was valued? What was not valued?
Valuation methodology Expected (“standard”) approaches, methods
Use of the residual approach to valuation
Use of the word “residual” in any context other than describing goodwill
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SEC Areas of Concern (cont.)SEC Areas of Concern (cont.)
Lifing assumptions Consistency with prior valuation analyses Consistency between publicly-available (and company-internal) information and the
purchase price allocation Press releases
Data found by searching the Internet
Industry analyst views
Board presentations
Reports prepared by financial advisors
Assignment of goodwill to reporting units Extreme focus on customer related intangibles
Consistency of Assumptions used in 141 and 142 analyses
Robust support for assumptions used
Focus on assets valued under the Residual Approach leading to Topic D-108
Lifing assumptions Consistency with prior valuation analyses Consistency between publicly-available (and company-internal) information and the
purchase price allocation Press releases
Data found by searching the Internet
Industry analyst views
Board presentations
Reports prepared by financial advisors
Assignment of goodwill to reporting units Extreme focus on customer related intangibles
Consistency of Assumptions used in 141 and 142 analyses
Robust support for assumptions used
Focus on assets valued under the Residual Approach leading to Topic D-108
July 2006
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Questions?Questions?
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Ernst & Young’s Taiwan ContactsErnst & Young’s Taiwan Contacts
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Principal, EYTAS (Taiwan)
Tel: +886-27204000 x 2510
Cell: 0958-714-715
E-mail: [email protected]
Dr. Ting, Nai-Hsin ( 丁迺忻 協理 )
Principal, EYTAS (Taiwan)
Tel: +886-27204000 x 2510
Cell: 0958-714-715
E-mail: [email protected]
Ernst & Young Transaction Advisory Services, Inc. (EYTAS, TW)致遠國際財務顧問股份有限公司
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Partner, EYTAS (Taiwan)
Tel: +886-27204000 x 2206
Cell: 0913-729-593
E-mail: [email protected]
Ms. Jenny Chen ( 陳靖玲 執行董事 )
Partner, EYTAS (Taiwan)
Tel: +886-27204000 x 2206
Cell: 0913-729-593
E-mail: [email protected]
