20th Annual Advanced Business Valuation Conference Sponsored by the American Society of Appraisers

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20th Annual Advanced Business Valuation
ConferenceSponsored by the American Society of
Appraisers
Goodwill Impairment The New FASB

• ROBERT E. DUFFY, ASA, CPA/ABV, CFA
• DARREN S. CORDIER
• Brueggeman and Johnson, P.C.
• 999 Third Avenue, Suite 4250 Seattle,
  Washington 98104(206) 223-1182 Fax (206)
  223-4774
• e-mail bob_at_bjval.com, darren_at_bjval.com

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SFAS 142 Goodwill and Other Intangible Assets

• Introduction
• Initial Implementation
• Ongoing Compliance
• Impairment Testing
• Questions and Answers

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Introduction
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Underlying Reasons

• Analysts and other users of financial
  statements, as well as company managements, noted
  that intangible assets are an increasingly
  important economic resource for many entities and
  are an increasing proportion of the assets
  acquired in many transactions. As a result,
  better information about intangible assets was
  needed. Financial statement users also indicated
  that they did not regard goodwill amortization
  expense as being useful information in analyzing
  investments.
• -- Summary, SFAS No. 142

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Background

• Statement 142 was passed on July 20, 2001 by a
  unanimous vote of the FASB
• Culminated nearly five years of research and
  deliberations that included discussions among the
  G41, 4 separate documents for public comment,
  over 60 public meetings, over 500 comment
  letters, and testimony before Committees of the
  House and Senate

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Summary of Key Elements

• Covers the accounting for intangible assets and
  goodwill acquired in a business combination or
  intangible assets acquired alone or as a group
• Ends pooling and goodwill amortization
• Increases financial statement visibility of
  intangible assets and goodwill including
  additional disclosures
• Creates reporting unit concept for initial
  testing of goodwill impairment

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Related Elements from Statement 141

• According to Statement 141, paragraph 39, an
  intangible asset shall be recognized as a asset
  apart from goodwill if it arises from contractual
  or other legal rights or, if not contractual,
  only if it is capable of being sold transferred,
  licensed, rented or exchanged
• The Assembled Workforce is not valued separately
  from goodwill

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What is an Intangible Asset?

• Intangible Assets -- Assets (not including
  financial assets) that lack physical substance.
  (The term intangible assets is used in this
  statement to refer to intangible assets other
  than goodwill.)

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What is Goodwill?

• Goodwill -- the excess of the cost of an acquired
  entity over the net of the amounts assigned to
  assets acquired and liabilities assumed. The
  amount recognized as goodwill includes the
  acquired assets that do not meet the criteria in
  Statement 141 for recognition as an asset apart
  from goodwill.

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What is Reporting Unit?

• Reporting Unit - The level of reporting at which
  goodwill is tested for impairment. A reporting
  unit is an operating segment or one level below
  an operating segment.

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What is an Operating Segment?

• Operating Segment - a component of an enterprise
• That engages in business activities from which it
  may earn revenues and incur expenses
• Whose operating results are regularly reviewed by
  the enterprises chief operating decision maker
• For which discrete financial information is
  available

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Implementation
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Timing for Implementation

• Shall be adopted in fiscal years beginning
  December 15, 2001
• Early adoption permitted for fiscal years
  beginning after March 15, 2001, if first interim
  financial statements have not been issued
• Retroactive application is prohibited
• Acquisitions after June 30, 2001 will not
  amortize goodwill

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Transitional Restatements

• Restate intangible assets currently on the books
  to meet the new recognition criteria
• Analyze useful life of intangible assets to
  determine those with finite lives and those with
  indefinite lives

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Transitional Impairment Tests

• Intangible assets with indefinite lives and
  goodwill will be initially tested for impairment
  at the beginning of the fiscal year
• Reporting units are identified and all assets
  (tangible, intangible, and goodwill) are
  allocated among them

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Timing of Transitional Tests

• The transitional intangible asset impairment test
  will be completed in the first interim period
• The first step of the goodwill impairment test
  completed in 6 months and the second step
  completed ASAP, but no later than 1 year

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Accounting for Transitional Impairment

• Any impairment identified during the transitional
  period are to be accounted for as a change in
  accounting principals

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Ongoing Implementation

• Reconsider amortization of each intangible asset
  including its remaining useful life
• Reclassify any intangible assets as necessary
• Perform impairment tests as necessary

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When to Test for Ongoing Impairment
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Asset Impairment Indicators

• A significant decrease in the market value of an
  asset
• Significant change in extent or manner in which
  the asset is used or significant physical change
  in the asset
• Significant adverse change in legal factors or in
  business climate that could affect the value of
  an asset or an adverse action or assessment by a
  regulator

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Asset Impairment Indicators (Continued)

• An accumulation of costs significantly in excess
  of the amount originally expected to acquire or
  construct an asset
• A current period operating or cash flow loss
  combined with a history of operating or cash flow
  losses or a projection or forecast that
  demonstrates continuing losses associated with an
  asset used for the purpose of producing revenue

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Goodwill Impairment Indicators

• A significant adverse change in legal factors or
  in the business climate
• Adverse action or assessment by a regulator
• Unanticipated competition
• Loss of key personnel

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Goodwill Impairment Indicators (Continued)

• Expectation of sale or disposal of a reporting
  unit or a significant portion thereof
• Testing under Statement 121 of a significant
  asset group in a reporting unit
• Recognition of a goodwill impairment loss in the
  financial statements of a subsidiary that is a
  component of a reporting unit

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Accounting for Impairment

• Amortization expense and impairment losses for
  intangible assets shall be presented in income
  statement line items within continuing operations
  as deemed appropriate for each entity
• Any goodwill impairment indicated is presented as
  a separate line item in the income statement
  before the subtotal income from continuing
  operations

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Accounting for Impairment (Continued)

• The only exception is if the goodwill impairment
  loss is associated with a discontinued operation
  in which case it is displayed net of taxes within
  the results of discontinued operations

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The Impairment Test
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What is the Test for Impairment?

• For intangible assets with indefinite lives,
  carrying value versus fair value
• For goodwill, a two part test
• First, test the carrying value of the reporting
  unit(s) versus fair value
• Second, if carrying value exceeds fair value,
  then compare the carrying value versus the fair
  value of goodwill

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Standard of Value

• Fair Value - the fair value of an asset (or
  liability) is the amount at which that asset (or
  liability) could be bought (or incurred) or sold
  (or settled) in a current transaction between
  willing parties, that is, other than in a forced
  or liquidation sale
• Fair value for reporting units includes synergies
  (which are part of goodwill)

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Measuring Fair Value

• Quoted market prices in active markets are the
  best evidence of fair value
• If quoted market prices are not available, fair
  value shall be based on the best information
  available

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Order of Testing and Level of Value

• If goodwill and another asset (or asset group) of
  a reporting unit are tested for impairment at the
  same time, the other asset (or asset group) shall
  be tested for impairment before goodwill
• The fair value of a reporting unit is measured at
  the control level and includes synergies

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Factors in Determining Useful Lives

• The expected use of the asset by the entity
• The expected useful life of another asset or a
  group of assets to which the useful life of the
  intangible asset may relate
• Any legal, regulatory or contractual provisions
  that may limit the useful life

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Factors in Determining Useful Lives (Continued)

• Any legal, regulatory or contractual provisions
  that enable the renewal or extension of the
  assets legal or contractual life without
  substantial costs
• The effects of obsolescence, demand, competition,
  and other economic factors
• The level of maintenance expenditures required to
  obtain the expected future cash flows from the
  asset

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Allocating Assets and Goodwill to Reporting Units

• The asset will be employed in or the liability
  relates to the reporting units operations
• The asset or liability will be considered in
  determining the reporting units fair value
• All goodwill will be assigned to reporting units
  in a manner that is reasonable and supportable
  and in a consistent manner

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When Can a Reporting Unit Valuation be Carried
Forward

• The assets and liabilities of unit have not
  changed significantly from most recent fair value
  determination
• The most recent fair value determination
  substantially exceeded the carrying amount of the
  reporting unit
• Given analysis of the events and circumstances
  from last determination, the likelihood is remote
  that fair value would be less than carrying value

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Practical Advice

• Understand the internal information sources of
  the company including
• Management reporting systems
• Transfer pricing studies
• Marketing studies
• Clarify managements role in data gathering and
  their effect on timely completion
• Clearly define the scope
• Get the auditors involved as soon as possible

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Questions and Answers