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Transaction Services August 3, 2008 SFAS 142 Valuation Case Study Prepared for the American Accounting Association.

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Presentation on theme: "Transaction Services August 3, 2008 SFAS 142 Valuation Case Study Prepared for the American Accounting Association."— Presentation transcript:

1 Transaction Services August 3, 2008 SFAS 142 Valuation Case Study Prepared for the American Accounting Association

2 Agenda Page 1Case Study Purpose1 2Case Background3 3Case Study Materials6 3.1Valuation Report and Schedules8 3.2Valuation Review Program12 3.3Key Issues Identification Exercise16 4Questions?20

3 Transaction Services Section 1 Case Study Purpose

4 SFAS 142 Valuation Case Study Prepared for the American Accounting Association 2 This SFAS 142 case study simulates an audit review of a valuation analysis performed for purposes of goodwill impairment testing The case is designed to introduce students to the following key concepts and skill areas: –Fundamental features of a typical valuation analysis and narrative report –Areas of significance upon which an auditor of a valuation analysis should focus his/her review –Identification of key value-driving assumptions within a valuation analysis and the means of verifying their accuracy –Methods of gaining comfort with the final conclusions of a valuation analysis Fair value measurements are an integral part of any impairment analysis Section 1 - Case Study Purpose

5 Transaction Services Section 2 Case Background

6 SFAS 142 Valuation Case Study Prepared for the American Accounting Association MMN Builders Impairment Test 4 MMN Builders, Inc. is a hypothetical, privately-held, homebuilder operating in the Northeast and Southwest regions of the United States As a result of the recent nationwide downturn in the housing market, the company has had to incur significant impairment charges in its home inventories under SFAS 144 These impairment charges constitute a triggering event for the testing of goodwill impairment under SFAS 142 The company has two reporting units (Northeast and Southwest) both of which will require impairment testing Section 2 - Case Background

7 SFAS 142 Valuation Case Study Prepared for the American Accounting Association MMN Builders Impairment Test (Continued) 5 MMN Builders has engaged Appraisal Professionals, LLC (a hypothetical valuation firm) to perform the valuation analysis underlying its SFAS 142 test Section 2 - Case Background

8 Transaction Services Section 3 Case Study Materials

9 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Materials Outline 7 Narrative report Quantitative valuation schedules Valuation review program (written exercise) Summary presentation instructions (oral exercise) Sample answer key Section 3 - Case Study Materials

10 Transaction Services Section 3.1 Valuation Report and Schedules

11 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Valuation Analysis Contents 9 SubjectReport SectionExhibit Number Company and Triggering Event Background Section 1 Industry OverviewSection 2 Engagement OverviewSection 3 Impairment Executive Summary Section 4Exhibits I and II Section 3.1 - Valuation Report and Schedules

12 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Valuation Analysis Contents (Continued) 10 SubjectReport SectionExhibit Number SFAS 142 Step 1 Discounted Cash Flow Public Company Multiples Section 5Exhibits III – VIII SFAS 142 Step 2 Northeast Reporting Unit Section 6Exhibits IX - XIV Assumptions and Limiting Conditions Appendix 1 Section 3.1 - Valuation Report and Schedules

13 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Valuation Analysis Contents (Continued) 11 SubjectReport Section Accounting GuidanceAppendix 2 Valuation MethodologyAppendix 3 Certifications and Qualifications Appendix 4 Section 3.1 - Valuation Report and Schedules

14 Transaction Services Section 3.2 Valuation Review Program

15 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Review Program Purpose 13 Provides a structured approach to reviewing valuations for goodwill impairment purposes in accordance with SFAS 142 Contains leading questions and references to appropriate accounting guidance to assist students in their review Sections can be reviewed all at once or piecemeal Section 3.2 - Valuation Review Program

16 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Review Program Content 14 Valuation background –Reason for impairment testing –Identification of reporting units –Assessing expertise of the appraiser SFAS 142 Step 1 – Valuation of reporting units –Market Approach (public company multiples) –Income Approach (discounted cash flow) >Discount rate calculation (weighted average cost of capital) Section 3.2 - Valuation Review Program

17 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Review Program Content (Continued) 15 SFAS 142 Step 2 – Valuation of intangible assets –Customer relationships (excess earnings method) –Trade name (relief from royalty method) –Assembled work force (replacement cost method) Section 3.2 - Valuation Review Program

18 Transaction Services Section 3.3 Key Issues Identification Exercise

19 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Purpose of the Exercise 17 Use the insights gained from answering questions in the review program to identify the key valuation issues requiring further investigation Develop strategies for testing and analyzing key valuation assumptions Gain an understanding of the sensitivities of these valuation assumptions to the ultimate impairment conclusion Section 3.3 - Key Issues Identification Exercise

20 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Exercise Description 18 Using responses to the review program questions as a guide, identify 5-8 key value-driving issues requiring further diligence Key issues should be those with the largest impact on the ultimate impairment conclusion For each issue, students should show: –Why the issue is critical? –How sensitive is the impairment conclusion to the issue? –Suggested verification procedures –Methods for reaching an ultimate conclusion on reasonableness Section 3.3 - Key Issues Identification Exercise

21 SFAS 142 Valuation Case Study Prepared for the American Accounting Association Potential Key Issues 19 Answer key provides specific examples of key issues –Projection assumptions –Understanding previous impairment charges for SFAS 144 –Trade name royalty rates –Customer attrition assumptions Numerous other issues can be identified Section 3.3 - Key Issues Identification Exercise

22 Transaction Services Section 4 Questions?


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