Three Things to Consider When Making Fair Value Determinations

Business Advisors|Business Valuation

By Stephen Thimons

As Schneider Downs winds its way through another busy season, I thought it would be beneficial to cover some key points to keep in mind when making fair value determinations (specifically for impairment testing and acquisitions). While none of these points are necessarily new or groundbreaking, hopefully this gentle reminder can help make current and future fair value determinations a lot less aggravating.

1. Know the Code – Understanding GAAP for fair value determinations is critical. There are many intricacies to be aware of as you perform fair value calculations. For example, did you know that:

  • Effective for fiscal years beginning after December 15, 2011 (although early adoption is permitted), ASU 2011-08, an amendment to ASC 350, allows a qualitative test (some people refer to this as “Step Zero”) for goodwill impairment. This test requires a company to determine if it is “more likely than not” (defined as a greater than 50% likelihood) that the fair value of a reporting unit is less than its carrying amount.
  • Step 2 of the goodwill impairment test under ASC 350 requires a company to determine the fair value of ALL of its assets and liabilities to determine if goodwill is impaired. However, you CANNOT use the results of this Step 2 analysis to actually write-up or write-down any asset other than goodwill. Each asset is subject to its own separate impairment test.

    Because of this rule, you can have an asset that appears to be impaired under Step 2 of the goodwill impairment test, but it is not written-down because it passed its own separate impairment test.
  • ASC defines fair value assuming an “exit” price. Therefore, it is possible that the amount paid (in other words, an “entrance” price) to acquire an asset or entity may not be its fair value. While these “entrance” and “exit” prices are often the same, it is not always the case.

2. Use of a Specialist – Many companies turn to outside consultants to help them navigate the muddy waters of fair value under GAAP. While this decision rests on a number of considerations (e.g., in-house expertise, in-house availability, cost), hiring an outside consultant can make the fair value determination a lot easier.

However, in order for that to be true, you have to pick the right consultant to assist you. Fair value for GAAP purposes can be much different than value determined for other purposes. It is important to hire consultants that have not only valuation experience, but specific experience determining fair value under GAAP. Otherwise, you may end up with an analysis that doesn’t meet your needs.

3. Communicate – Regardless of whether you’re a GAAP and fair value expert and plan on flying solo or you want the help of an outside consultant, communicate those plans with your friendly auditor. When everyone has the same expectations for how the process will work, what the timeframe is, what the final deliverable will be, etc., you can avoid surprises and make fair value determinations fun (okay, that’s probably not true, but it can at least minimize pain).

If you have any questions on fair value determinations, contact Steve Thimons at sthimons@schneiderdowns.com or 412-697-5281. 

© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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