Valuation Issues Raised by Financial Accounting Statement 142

Excerpt taken from Dr. Stanley J. Feldman’s A Primer on Calculating Goodwill Impairment

The accounting rules governing business combinations, goodwill and intangible assets changed as a result of the FASB introducing Financial Accounting Standard (FAS) No: 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, on June 30, 2001. The introduction of 141 removed the use of pooling when accounting for acquisitions in favor of the purchase method. FAS142 provides guidance for determining whether tangible and intangible assets and goodwill have lost market value, or in the language of the FASB have been impaired, subsequent to their purchase. Both 141 and 142 break new ground since they focus on the “fair market values” rather than book values of acquired assets, liabilities and goodwill.

Implementation of 142 raises critical business valuation issues that center on measuring the fair market value of a reporting unit. Based on the language of the Statement and Appendix B in particular, the Board has concluded the following:

  1. Goodwill is measured at the reporting unit level.
  2. Testing for goodwill impairment requires that the reporting unit be valued.
  3. The fair market value of the reporting unit is equal to what a willing buyer would pay for full control of the reporting unit when the buyer and sellers are not under any compulsion to transact.
  4. In most instances, the Board recognizes that the value of a reporting unit will be estimated using a discounted cash flow methodology. FAS 142 is consistent with Concepts Statement 7 which states (refer to paragraphs 39-54 and 75-88 of Concepts Statement No.7, Using Cash Flow Information and Present Value in Accounting Measurements) that a “present value technique is often the best available technique with which to estimate the fair value of a group of net assets (such as a reporting unit). The cash flows that are expected to materialize should reflect estimates and expectations that marketplace participants would use to develop fair market value estimates of the reporting unit.”
  5. Appendix E of FAS 142 summarizes relevant sections of Concepts Statement 7 as it relates to calculating the present value of cash flows. This Statement indicates that where appropriate, the present value calculation should reflect discounts for lack of liquidity and/ or marketability.
  6. Based on the above, the value of a non-public reporting unit should reflect a premium for control and a discount for lack of marketability.
  7. If the value of the reporting unit is less than its carrying value, then this may indicate that goodwill is impaired. To test for this, the Statement requires that the standalone fair market value of all identified tangible and intangible assets be established. The difference between the fair market control value of the reporting unit and the aggregated standalone value of identified assets is equal to implied goodwill. If this value is less than the carrying value of goodwill, then goodwill is deemed to be impaired.
  8. FAS 142 requires that intangible assets be identified, allocated to reporting units, and valued accordingly. Appendix A of the Statement gives examples of classes of intangible assets. They are: customer lists, patents, copyright, broadcast licenses, airline route authority, and trademarks.

Valuing Small Businesses for Estate Purposes

On May 4, 2014, Roger Winsby, President, Axiom Valuation Solutions  attended the California Probate Referee Convention in San Diego, California. Roger gave a presentation entitled “Valuing Small Businesses for Estate Purposes – Small Does Not Mean Simple”, where he discussed issues such as the importance of facts and circumstances in valuing small businesses and the use of financial models and empirical data to support assumptions and adjustments.

The presentation also included case studies of operating businesses, asset holding entities, and case studies by industry — including construction companies, the machine tool industry, and personal services industries.

Click here for a copy of the presentation.

Mr. Vladimir Hulpach, CVA, Named Managing Director of Axiom Valuation Solutions Arizona

Axiom Valuation Solutions Arizona is an affiliate of Axiom Valuation Solutions, a leading business and financial security valuation firm serving clients across North America, Europe, Latin America, and Asia. As Managing Director, Mr. Hulpach will be responsible for engagements that run the gamut from valuing private firms for various purposes, including estate planning and acquisitions, to valuing various types of intangible assets including patents and trade names.

Mr. Hulpach received master degrees in Economics and International Trade from the University of Economics in Prague, and he has recently been awarded the prestigious Certified Valuation Analyst (CVA) designation from the National Association of Certified Valuators and Analysts.

Vlad Hulpach, CVA

Vlad Hulpach, CVA

“We are very fortunate to have a person of Vladimir’s talents and capabilities joining the Axiom family,” states Dr. Stanley Jay Feldman, Chairman of Axiom Valuation Solutions. “Axiom has been a leader in providing fixed price, cost-effective, high quality valuation services nationwide. Vladimir will be able to provide Axiom’s valuation services and financing connections to business owners in the Valley, while also contributing his local knowledge, contacts, and expertise to these engagements. This combination of local and national knowledge, connections, cost-effectiveness, and expertise will deliver solutions to Arizona companies that have simply not been available in this market.”
Since 2001, Axiom has provided a comprehensive range of valuation services to thousands of business owners of private companies, private equity and venture capital financed companies, and public companies. In 2013, two long-time Axiom clients, Chimerix and Oxford Immunotec, had successful IPOs. Axiom played a critical role for both companies in developing the valuation analyses used in the SEC filings.

“I am looking forward to working with Axiom that has an in-depth understanding of what it takes for private firms to expand, has access to capital sources needed to finance private firm growth, and is recognized by the BIG 4 and various regulatory agencies as a highly qualified valuation firm. Working together, we will deliver enormous value for our clients,” states Mr. Hulpach.

Axiom Valuation Moderates Session at BEPC on Maximizing After-tax Proceeds of the Sale of a Closely Held Business

Roger Winsby, President and co-founder of Axiom Valuation Solutions, filled in for Dr. Stan Feldman at the Boston Estate Planning Council (BEPC) February Member Round Table Breakfast on February 4, 2014.

Program Title:  Maximizing the after-tax Proceeds of the Sale of a Closely-held Business

Program Description:    One of the many  myths of selling a closely-held business is that the best sales price also yields the most after-tax proceeds. This seminar will address why this may not always be the case, how to structure a transaction to ensure that all of the seller’s objectives are met including maximizing  the after-tax proceeds  of the sale and minimizing  what we  term deferred liability- the risk of the seller not getting what was negotiated.   Benefits to attendees include:

1.      Learning how identifying and quantifying personal goodwill offers a way to maximize the after-tax proceeds of a sale.

2.      Learning what the conditions need to be to minimize IRS pushback from using a personal goodwill strategy.

3.      Learning why identifying and valuing the intangible assets, excluding goodwill, of a business results in a business owners receiving higher sales multiples

4.      Learning that deal terms often have hidden costs that far outweigh their tax benefits.

        Link to Presentation PDF:          2013.02.04. Maximizing After-tax Proceeds of Sale

Upcoming Free Webinar on 7/18/2013: Valuing Personal Goodwill and Minimizing Pushback from the IRS

Axiom Valuation Solutions is pleased to offer the Webinar, “Valuing Personal Goodwill and Minimizing Pushback from the IRS”.  This Webinar was originally held in December of 2012.  The original response was so encouraging, that we decided to offer it again.

Objective: Understanding the proper valuation of personal goodwill during an acquisition and the ensuing tax implications.

Dr. Stan Feldman, Co-Founder and Chairman of Axiom Valuation Solutions will be the presenter.  Dr. Feldman is a recognized expert in the field of valuation and has published many articles and books on the subject.  He was an Associate Professor of Finance for over 22 years and as a member of the Financial Accounting Standards Board’s (FASB) Valuation Resources Group, helped draft FAS 157 (now Topic 820)

The webinar will cover the following topics:

  • How is personal goodwill defined?
  • What is the difference between personal goodwill and corporate goodwill?
  • What are the benefits of establishing and valuing personal goodwill?
  • What standards does the value of personal goodwill have to meet to minimize pushback from the IRS?
  • Case Study
  • Final Thoughts