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Transaction Services
August 3, 2008
SFAS 142 Valuation Case StudyPrepared for the American Accounting Association
Agenda
Page
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
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Section 1Case Study Purpose
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
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Section 2Case Background
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
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
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Section 3Case Study Materials
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
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Section 3.1Valuation Report and Schedules
SFAS 142 Valuation Case Study • Prepared for the American Accounting Association
Valuation Analysis Contents
9
Subject Report Section Exhibit Number
Company and Triggering Event Background
Section 1
Industry Overview Section 2
Engagement Overview Section 3
Impairment Executive Summary
Section 4 Exhibits I and II
Section 3.1 - Valuation Report and Schedules
SFAS 142 Valuation Case Study • Prepared for the American Accounting Association
Valuation Analysis Contents (Continued)
10
Subject Report Section Exhibit Number
SFAS 142 Step 1
Discounted Cash Flow
Public Company Multiples
Section 5 Exhibits III – VIII
SFAS 142 Step 2 Northeast Reporting Unit
Section 6 Exhibits IX - XIV
Assumptions and Limiting Conditions
Appendix 1
Section 3.1 - Valuation Report and Schedules
SFAS 142 Valuation Case Study • Prepared for the American Accounting Association
Valuation Analysis Contents (Continued)
11
Subject Report Section
Accounting Guidance Appendix 2
Valuation Methodology Appendix 3
Certifications and Qualifications
Appendix 4
Section 3.1 - Valuation Report and Schedules
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Section 3.2Valuation Review Program
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
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
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
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Section 3.3Key Issues Identification Exercise
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
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
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
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Section 4Questions?