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

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

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• 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

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• 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

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• 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)

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• 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

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• 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

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• 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

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• 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?