Accounting for Goodwill and Other Intangibles: Fair Value Measurements

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Organization
  • The FASB Accounting Standards Codification™
    • Key Items Regarding the FASB ASC
    • Population of FASB ASC
    • Essential and Nonessential Content
    • Topical Structure
    • Referencing the FASB ASC
    • A Helpful Tool
• Chapter 1 - Introduction to Fair Value Accounting
  • Learning Objectives
  • Introduction
  • The Changing Economic Environment
    • The Future of the Accounting and Auditing Profession
    • The FASB and IASB Convergence Project
    • Recent SEC Releases
    • Effect on Private Companies
  • History of Fair Value in Financial Reporting
    • Business Combinations
    • Goodwill and Other Intangible Assets
  • Framework for Fair Value Measurements
    • Fair Value Option
  • Fair Value Measurements and Disclosures
    • The Price
    • The Principal (or Most Advantageous) Market
    • Transaction Costs
    • Market Participants
    • Highest and Best Use Application Criteria Applied in Fair Value Measurements
    • Application of Fair Value to Liabilities
    • Fair Value at Initial Recognition
    • Valuation Approaches in Determining Fair Value
    • Other Definitions – Inputs
    • Fair Value Hierarchy
    • FSP FAS 157-3 – Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
  • Application of Fair Value Accounting and the Recent Economic Crisis
    • Where Do We Go From Here?
    • SEC Study Defends Fair Value Accounting
  • Conclusion
• Chapter 2 - Overview of Fair Value Measurements in Business Combinations and Subsequent Testing for Impairment
  • Learning Objectives
  • Introduction
  • Applying Fair Value Measurements to Business Combinations
    • Revised Accounting for Business Combinations
  • The Acquisition Method
    • Indentifying the Acquirer
    • Acquisition Date
    • Fair Value of the Business Acquired
    • The Separability and Contractual-Legal Criteria
    • In-Process Research and Development (IPR&D)
    • Comprehensive Example of the Acquisition Method
  • Goodwill and Other Intangible Assets
  • Impairment Testing
    • When to Test for Ongoing Impairment
    • Order of Testing and Level of Value
    • Nature of Goodwill
    • Carrying Value vs. Fair Value
    • Measuring Fair Value
    • From a Business Valuation Specialist’s Prospective
    • Carrying Forward an Impairment Test Valuation
  • Accounting for the Impairment or Disposal of Long-Lived Assets
    • Impairment of Long-Lived Assets Subject to Amortization
    • Impairment of Long-Lived Assets Not Subject to Amortization
  • Appendix – The Acquisition Method
• Chapter 3 - How Identifiable Intangible Assets Create Value in a Business
  • Learning Objectives
  • Introduction
  • Understanding the Value of Intangible Assets
  • Types of Intangible Assets
    • Unique Characteristics of Intangible Assets
    • Classifying Intangible Assets
    • Intellectual Property
  • Relevant U.S. GAAP
  • Identifying Intangible Assets
    • Economic Balance Sheet
  • Conclusion
  • Questions
• Chapter 4 - The Cost Approach
  • Learning Objectives
  • Introduction
  • Cost Approach
    • Definitions
    • The Economic Basis
    • Cost Approach Perspective
    • The Basic Formula
    • Consideration of Costs
    • Tax Implications in Using the Cost Approach
    • Conclusions and Considerations in Utilizing the Cost Approach in Estimating Fair Value
  • Questions
• Chapter 5 - The Market Approach
  • Learning Objectives
  • Introduction
  • Relief from Royalty Method
    • Example of Relief Royalty Method
  • Comparable Transactions Method
    • Example of Comparable Transaction Method
  • Intellectual Property Auctions
  • Rules of Thumb
  • Transactions Involving Intangible Assets of the Subject Company
    • Sources of Information
    • SEC Filings
    • Commercial Products
    • Court Cases
    • Sources of Additional Information
  • Conclusion
  • Questions
• Chapter 6 - The Income Approach
  • Learning Objectives
  • Introduction
  • Profit Split Method (25% Rule)
  • Excess Earnings Method
  • Loss of Income (Scenario Method)
    • Example of the Loss of Income Method
  • Multi-Period Excess Earnings Method
    • Returns On and of Contributory Assets
  • Rates of Return (Discount Rates) for Intangible Assets
    • Adjusted Economic Balance Sheet
    • Guidance for Rate of Return of Contributory Assets
  • Other Considerations
    • Economic Life
    • Tax Effect and Amortization Benefit
  • Conclusion
• Chapter 7 - Options and Other Advanced Methods for Valuing Contingency-Based Intangible Assets
  • Learning Objectives
  • Introduction
  • Limitations of Traditional Discounted Cash Flow
  • Introduction to Option Theory
    • Option Basics
    • Descriptive Terminology
    • Components of Value
  • Valuing Stock Options
    • The Black-Scholes Model
    • The Binomial Model
  • Typical Assets Valued Using Options Methodology
  • Definitions
  • Keys to Black-Scholes Model
    • Using Option Pricing Methodologies to Value Intangible Assets
  • Monte Carlo Simulations
  • Decision Tree Analysis
    • Example of Decisions Tree Analysis in Estimating the Fair Value of Technology
  • Conclusion
  • Questions
• Chapter 8 - Useful Life Analysis
  • Learning Objectives
  • Introduction
  • Useful Life of an Intangible Asset
    • FSP FAS 142-3, Determination of the Useful Life of Intangible Assets
  • Factors That Determine Useful Lives
    • Legal Lives
    • Contractual Lives
    • Functionality and Technological Issues
    • Economic Lives
    • Analytical (Historical Turnover)
    • Limited Data
  • Conclusion
• Chapter 9 - Case Study: Valuation of Patented Technology
  • Learning Objectives
  • Business Background and Facts
    • Atlanta Beverage Corporation
    • Calcium Beverage Corporation
    • The Transaction
    • Patents
    • Valuation of the Patented Technology
    • Relief from Royalty Method
    • Profit Split Method
    • Multi-Period Excess Earnings Method
    • Useful Life of the Technology
    • Amortization Benefit
    • Conclusions
• Chapter 10 - Latest Developments

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Chapter 0 - Overview

Course Objectives

• Provide an introduction to fair value accounting.

• Apply proper fair value accounting treatment for a business combination under United States generally accepted accounting principles (U.S. GAAP).

• Present an introduction to the valuation of intellectual property and other intangible assets.

• Review the cost, market, and income approaches to measure the fair value of assets.

• Review options and other advanced methods for valuing contingency-based intangible assets.

• Provide an understanding of useful life analysis.

• Present a comprehensive case study covering the course topics.

A Special Note Regarding References to Financial Accounting Standards Board (FASB) Pronouncements

To align our materials with the FASB Accounting Standards Codification™ (ASC) we are utilizing the FASB's recommended referencing system in the course materials. For example, a prior reference to SFAS No. 157 will now appear as FASB ASC 820, Fair Value Measurements and Disclosures (SFAS No. 157) retaining the prior reference parenthetically. For detailed information on the FASB ASC, visit www.fasb.org. At the time this course was updated, the FASB planned to approve, and make the FASB ASC authoritative in July 2009. A brief description of the FASB ASC appears in this chapter.

Introduction

FASB ASC 820, Fair Value Measurements and Disclosures (SFAS No. 157) provides additional clarification of the concepts of fair value in financial reporting. The guidance provides one standard definition of fair value; describes in more detail the concept of market participants; and introduces the fair value hierarchy. FASB ASC 820 (SFAS No. 157) also discusses the application of various valuation techniques estimating fair value.

The process of fair value measurements differs from the process under more conventional accounting. Fair value measurements often employ the use of inputs (assumptions) that may or may not be verifiable in the market place as described in the fair value hierarchy. In many situations, particularly those involving the measurement of the fair value of intangible assets, the inputs and the conclusion often result from judgment, either from management or an outside independent valuation specialist. FASB ASC 820 (SFAS No. 157) refers to these assumptions as unobservable, meaning the assumptions are derived from reasonable judgment rather and observed in the marketplace. The most common unobservable inputs to valuation techniques involve the measuring of the fair value of intangible assets, particularly related to business combinations and testing for impairment of individual assets.

FASB ASC 805, Business Combinations [SFAS No. 141(R)] describes two criteria used to determine whether an intangible asset is considered identifiable and thus the fair value of the asset has to be measured. An intangible asset is considered identifiable if it meets either of the following two criteria:

• The asset is separable (capable of being separated or divided from the acquired enterprise and sold, transferred, licensed, rented, or exchanged, regardless of whether there is an intent to do so) or the asset cannot be sold, transferred, licensed, rented, or exchanged individually but can be sold, transferred, licensed, rented, or exchanged with a related contract, asset, or liability; or

• The asset arises from contractual or other legal rights (regardless of whether those contractual or legal rights are transferable or separable from the acquired enterprise or from other rights and obligations).

There are three basic approaches used to estimate the fair value of intangible assets. These approaches, referred to by FASB ASC 820 (SFAS No. 157) as valuation techniques, are the cost approach, the market approach, and the income approach. Often these techniques use unobservable inputs.

The cost approach is a general way of determining the fair value of an intangible asset by using the cost of reproduction or replacement new less any obsolescence.

The market approach is a general way of determining the fair value of an intangible asset by using one or more methods that compare the subject intangible asset to intangible assets that have been sold in the market place. Generally this can be accomplished by a comparison to publicly-traded guideline companies or by an analysis of actual transactions of similar businesses or assets sold.

The income approach is a general way of determining a fair value of an intangible asset using one or more methods that convert anticipated benefits into a present single amount. The application of the income approach estimates fair value by methods which discount or capitalize cash flow, by a discount or capitalization rate that reflects market rate of return expectations, market conditions and the risk of the intangible asset. Generally this can be accomplished by variations of either the capitalization of earnings or cash flow methods or the discounted cash flow method.

Fair value measurement using the valuation techniques requires specialized skill either within management or by using an outside independent valuation specialist. Management still accepts responsibility for the fair value measurements that are reported on the financial statements similar to any other accounting. Certainly then it is incumbent upon management to have some basic understanding of the various techniques to measure fair value, particularly of intangible assets.

Organization

This course will cover existing U.S. GAAP included in the FASB ASC for accounting for goodwill and other intangible assets using fair value accounting.

The course is a combination of discussion, examples to illustrate the concepts, plus thoughtful questions and answers and cases to test the understanding of the concepts covered in the course.

The course is organized as follows:

• Chapter 1 - Introduction to Fair Value Accounting

• Chapter 2 - Overview of Fair Value Measurements in Business Combinations and Subsequent Testing for Impairment

• Chapter 3 - How Identifiable Intangible Assets Create Value in a Business

• Chapter 4 - The Cost Approach

• Chapter 5 - The Market Approach

• Chapter 6 - The Income Approach

• Chapter 7 - Options and Other Advanced Methods for Valuing Contingency-Based Intangible Assets

• Chapter 8 - Useful Life Analysis

• Chapter 9 - Case Study: Valuation of Patented Technology

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