Accounting Implications John F' Manning Partner, Deloitte

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Accounting ImplicationsJohn F.
ManningPartner, Deloitte Touche(617)
437.2110jomanning_at_deloitte.com
Massachusetts Software Internet Council
January 25, 2002
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What Shall We Talk About?

• Whats New in the Accounting World?
• Whats the Impact of These Changes?
• Goodwill and Impairment Standards
• Ongoing Implications of Changes in Goodwill
  Accounting
• Valuation Studies

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Whats New in the Accounting World?

• Poolings are no more
• All acquisitions after June 2001 must be
  accounted for as purchases
• Increased rigidity around assumed options in a
  business combination
• Unvested awards result in compensation expense
• No more amortization of goodwill and certain
  other intangibles
• However, impairment tests must now be conducted
  annually

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Whats the Impact of These Changes?

• Restrictions imposed by poolings are gone
• Increased flexibility in deal structure
• Increased use of contingent consideration, i.e.
  earnouts
• Increased use of lockups to avoid float issues
• Changes to goodwill accounting
• Cessation of amortization
• Improved earnings performance
• Increase in one-time write-offs
• Increased need to properly allocate cost to
  assets acquired
• SEC to look for value pushed to intangibles other
  than goodwill

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Ongoing Implications of Changes

• SEC has indicated that they believe the best
  indicator of value is market value for public
  companies
• Swings in market could result in impairment
  charges due to temporary drops in value
• Rules allow other methods to be used, but not
  clear on how to apply them
• Market premiums for takeover
• Cash flow models

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Goodwill and Impairment Standards

• New rules change way impairment is assessed
• Many companies used a recoverability model
• If sufficient cash flow existed to absorb
  amortization, no impairment
• New rules require use of a fair value model
• If fair value less than carrying value, you
  have to take a charge based on additional
  procedures
• With decline in market values, it is expected
  that many companies will be recording charges on
  adoption of the new rules

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Valuation Studies

• Need for them will increase
• Increased scrutiny on allocation at initial
  purchase date
• Requirement to assess fair value impairment
• If assessments are done at low levels, how do you
  determine the units fair value?
• Need to determine goodwill writedown when
  impairment noted
• Required to do a new allocation to assets, both
  recorded and unrecorded, to determine the amount
  of impairment recorded
• Increased attention to accounting issues requires
  care on the part of management
• Third party valuations reduce risk and increase
  accuracy