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Draft. SFAS 142 Valuation Case Study. Prepared for the American Accounting Association. August 3, 2008. Transaction Services. 1. Case Study Purpose. 1. 2. Case Background. 3. 3. Case Study Materials. 6. 3.1. Valuation Report and Schedules. 8. 3.2. Valuation Review Program. 12.

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Transaction Services

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

  2. 1 Case Study Purpose 1 2 Case Background 3 3 Case Study Materials 6 3.1 Valuation Report and Schedules 8 3.2 Valuation Review Program 12 3.3 Key Issues Identification Exercise 16 4 Questions? 20 Agenda Page

  3. Section 1 Case Study Purpose 1

  4. Section 1 - Case Study Purpose Fair value measurements are an integral part of any impairment analysis 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

  5. Section 2 Case Background 3

  6. Section 2 - Case Background 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

  7. Section 2 - Case Background 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

  8. Section 3 Case Study Materials 6

  9. Section 3 - Case Study Materials Materials Outline 7 • Narrative report • Quantitative valuation schedules • Valuation review program (written exercise) • Summary presentation instructions (oral exercise) • Sample answer key

  10. Section 3.1 Valuation Report and Schedules 8

  11. Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents 9

  12. Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents (Continued) 10

  13. Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents (Continued) 11

  14. Section 3.2 Valuation Review Program 12

  15. Section 3.2 - Valuation Review Program 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

  16. Section 3.2 - Valuation Review Program 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)

  17. Section 3.2 - Valuation Review Program 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)

  18. Section 3.3 Key Issues Identification Exercise 16

  19. Section 3.3 - Key Issues Identification Exercise 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

  20. Section 3.3 - Key Issues Identification Exercise 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

  21. Section 3.3 - Key Issues Identification Exercise 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

  22. Section 4 Questions? 20

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