1. © Copyright 2006. # ! E July 2006 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 Michael W. Tully, CFA, ASA Los Angeles, CA TAS – Valuation and Business Modeling Transaction Advisory Services

2. 2 Agenda  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

3. © Copyright 2006. # ! E July 2006 Fair Value Accounting

4. Basics of SFAS 141/142  SFAS 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  SFAS 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

5. 5 Intangible Assets Recognized as Assets Apart from Goodwill 1 : Basics of SFAS 141/142 (cont’d) Intangible Assets Recognized as Assets Apart from Goodwill 1 : 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

6. Basics of SFAS 141/142 (cont’d)  SFAS 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  SFAS 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

7. Basics of SFAS 141/142 (cont’d)  SFAS 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  SFAS 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

8. 8 Basics of SFAS 141/142 (cont’d)  Adoption Process – SFAS 142 Define Reporting Units (RU) Define Reporting Units (RU) Assign Assets & Liabilities Incl. GW To RU Assign Assets & Liabilities Incl. GW To RU Perform Step 1: Test (Business valuation comparison to carrying value) Perform Step 1: Test (Business valuation comparison to carrying value) Finish No Further Action Necessary Finish No Further Action Necessary Perform Step 2: Measurement (Deemed purchase price allocation to RU Fair Value) Perform Step 2: Measurement (Deemed purchase price allocation to RU Fair Value) Finish Write Off GW If Indicated (Carrying amount of GW exceeds current Fair Value) Finish Write Off GW If Indicated (Carrying amount of GW exceeds current Fair Value) Start Pass Fail Analyze Existing Goodwill (GW) and Intangible Assets

9. © Copyright 2006. # ! E July 2006 Valuation Analysis of Intangible Assets - Methodology

10. 10 Methodology Framework: Intangible Asset Valuation

11. 11 Multi-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”)

12. 12 Relief 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”)

13. 13 Incremental 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”)

14. 14 Commonly Identified Intangible Assets: Summary of Primary Valuation Methodology

15. © Copyright 2006. # ! E July 2006 SEC Areas of Concern on Fair Value Measurements

16. 16 SEC 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

17. 17 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

18. © Copyright 2006. # ! E July 2006 Questions?

19. 19 Ernst & Young’s Taiwan Contacts  Dr. Ting, Nai-Hsin ( 丁迺忻 協理 ) Principal, EYTAS (Taiwan) Tel: +886-27204000 x 2510 Cell: 0958-714-715 E-mail: NH.Ting@tw.ey.com Ernst & Young Transaction Advisory Services, Inc. (EYTAS, TW) 致遠國際財務顧問股份有限公司  Ms. Jenny Chen ( 陳靖玲 執行董事 ) Partner, EYTAS (Taiwan) Tel: +886-27204000 x 2206 Cell: 0913-729-593 E-mail: Jenny.Chen002@tw.ey.com  Ms. Jenny Chen ( 陳靖玲 執行董事 ) Partner, EYTAS (Taiwan) Tel: +886-27204000 x 2206 Cell: 0913-729-593 E-mail: Jenny.Chen002@tw.ey.com