Presentation on theme: "Sprint Nextel 2007 Fair Value and Impairment"— Presentation transcript:
1Sprint Nextel 2007 Fair Value and Impairment Earl K. SticePricewaterhouseCoopers Professor of AccountingBrigham Young University3 August 2008
2Topics Covered in the Case 6 questions addressImpairment analysis and asset valuation (Questions 1 and 2)Fair value disclosures (Question 3)Valuation sensitivity analysis (Questions 4, 5, and 6)
3Developments During 2007Operating income in each quarter in 2007 was down compared to the same quarter in Total decrease of 63%.Average revenue per user (ARPU) declined during each quarter in 2007 compared to the same quarter in 2006.The market value of the company dropped from $55 billion to $37 billion.
6Impairment Analysis of PPE According to SFAS No. 144, par. 18, “the remaining life of an asset group shall be based on the remaining useful life of the primary asset of the group.”For the property, plant, and equipment of the Wireless segment, this asset is the network equipment.Remaining useful life = 8 years
7Impairment Analysis of PPE Estimated annual lease payment = $4,250$34,000 = 8 years × $4,250 per year.$34,000 > $22,882The Wireless segment’s property, plant, and equipment is NOT impaired.
8Impairment Analysis of PPE Where should students have questions about the data?What is the source of the lease payment data?8 years? Not 10 years? Not 5 years?
9Impairment Analysis of Goodwill Step 1 – fair value of Wireless segment greater than book value?Step 2 (if necessary) – estimate fair values of all Wireless segment assets and liabilities.Step 3 (if necessary) – recompute goodwill.
10Impairment Analysis of Goodwill Indirect Valuation “We [reduce] our stock price by the estimated value per share of our Wireline reporting unit and then [add] a control premium, as permitted by FASB guidance, to determine an estimate of the equity value of the Wireless reporting unit.”
11Impairment Analysis of Goodwill Indirect Valuation
12Impairment Analysis of Goodwill Indirect Valuation
13Impairment Analysis of Goodwill Indirect Valuation Price-to-revenue multiple:1.21 × 6.46 = $7.8 billionPrice-to-EBITDA multiple:3.45 × 1.07 = $3.7 billionThe average of these two estimates is $5.8 billion = estimate of value of Wireline segment.
14Impairment Analysis of Goodwill Indirect Valuation
15Impairment Analysis of Goodwill Indirect Valuation Book value of Wireless segment as of December 31, 2007:$52.8 billionEstimated market value of Wireless segment as of December 31, 2007:$33 billionYes, goodwill may be impaired.
16Impairment Analysis of Goodwill Indirect Valuation Where should students have questions about the data?In this case, they should realize that the market value of the Wireless segment is substantially less than its book value no matter what assumptions are made.
17Impairment Analysis of Goodwill Direct Valuation Sprint Nextel also estimates the market value of the Wireless segment through an income approach which involves the computation of the present value of an estimate of the cash flows to be generated by the segment.
18Impairment Analysis of Goodwill Direct Valuation
19Impairment Analysis of Goodwill Direct Valuation
20Impairment Analysis of Goodwill Step 1 – Yes, goodwill may be impaired.So, on to Step 2 which is estimating the fair values of all Wireless segment assets and liabilities.
21Valuation of FCC Licenses “Relief from royalty” methodUse market royalty rates charged for the use of similar licenses.The fair value of the licenses is the present value of the after-tax royalties that Sprint Nextel is avoiding by owning the licenses.
22Valuation of FCC Licenses “Relief from Royalty” Method Search in a proprietary royalty rate databaseRates ranging from 2% to 8%Average rate of 4.2%The royalty is based on revenue, before the subtraction of any expenses.
23Valuation of FCC Licenses “Relief from Royalty” Method
24Valuation of FCC Licenses “Relief from Royalty” Method
25Valuation of FCC Licenses “Relief from Royalty” Method Estimated fair value of FCC licenses:$ billionBook value of FCC licenses:$ billion
26Valuation of FCC Licenses “Relief from Royalty” Method Where should students have questions about the data?Royalty rateCustomer growth rateTerminal yearPost-terminal year growth rateDiscount rate
27Valuation of Customer Relationships Excess cash flow valuationAssume that other assets earn a normal return.“Other assets” includes the fair values of both recognized and unrecognized assets.Exclude goodwill.
37SFAS No. 157 Disclosure FCC licenses: Book value = $21.123 billion Fair value = $ billionCustomer relationships:Book value = $4.203 billionFair value = $7.499 billionWhy no fair value disclosure?
38Points to RememberOur accounting students need to understand valuation models.Experience with valuation models will teach our accounting students where the pressure points are.Teaching about fair value is much more than teaching SFAS No. 157 disclosures.