Transaction Advisory Services
The Joint 14th Annual PBFEA and 2006
Annual FeAT Conference
U.S. Financial Accounting Valuation
Michael W. Tully, CFA, ASA
Los Angeles, CA
TAS – Valuation and Business Modeling
July 2006
© Copyright 2006.
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Agenda

Fair Value Accounting – US GAAP

Valuation Analysis of Intangible Assets Methodology

SEC Areas of Concern
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Fair Value Accounting
July 2006
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Basics of SFAS 141/142

SFAS 141
 All business combination transactions must follow purchase
accounting (i.e. pooling is gone)
 Intangible assets are recorded apart from goodwill
 Much clearer guidance of what constitutes an intangible asset for
GAAP purposes (paragraph 39)
– Legal/contractual
– Separable
 Detailed listing of potential intangible assets provided
– Appendix A, paragraph A14 (see next page)
 Significantly increases the disclosure requirements about
Business Combinations
Basics of SFAS 141/142 (cont’d)
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Intangible Assets Recognized as Assets Apart from Goodwill :
• Marketing-related
– Trademarks, trade names,
service marks
– Non-compete agreements
– Internet domain names
• Customer-related
– Customer lists
– Backlog
– Customer contracts
– Noncontractual relationships
• Artistic-related
– Plays, operas, ballets
– Books, magazines, newspapers
– Musical works
– Video, including motion pictures
and TV programs
– Pictures, photographs
• Contract-based
– Licensing, royalty agreements
– Franchise or lease agreements
– Employment contracts
– Use rights
– Construction permits
– Service or supply contracts
– Operating and broadcast rights
• Technology-based
– Patented and unpatented
technology
– Databases
– Trade secrets (such as secret
formulas, processes and recipes)
– Computer software
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SFAS 141, Appendix A paragraph A14
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Basics of SFAS 141/142 (cont’d)
 SFAS
142
 Eliminates amortization of goodwill and introduces an impairment-only
approach
 Introduces the concept of a reporting unit and the need to assign assets
and liabilities including all goodwill to reporting units
 Creates a two-step process for the transitional, annual & interim testing
and measurement of goodwill impairment
–
–
Step 1 – essentially a business valuation and comparison of
reporting unit fair value to carrying value
Step 2 – essentially a “deemed” purchase price allocation
requiring asset valuations to conclude on current fair
value of goodwill
Basics of SFAS 141/142 (cont’d)
 SFAS
142
 Eliminates 40 year maximum life on intangibles
 Creates a new class of “indefinite lived” intangibles with a need for
transitional, annual & interim fair value – based impairment testing
and measurement
 Requires finite lived intangible assets to be amortized using a method
that reflects pattern in which the economic benefits of the intangible
asset is consumed or otherwise used up
 Adds to disclosures previously required:
– Information about changes in the carrying value of goodwill
– Carrying amount of intangible assets by major intangible asset class for
those subject to amortization and those not subject to amortization
– Estimated expense related to intangible assets for the next five years
Basics of SFAS 141/142 (cont’d)

Adoption Process – SFAS 142
Fail
Define
Reporting
Units (RU)
Start
Assign Assets
& Liabilities
Incl. GW
To RU
Perform
Step 1: Test
(Business valuation
comparison to
carrying value)
Perform
Step 2:
Measurement
(Deemed purchase
price allocation
to RU Fair Value)
Finish
Write Off
GW If
Indicated
(Carrying amount
of GW exceeds
current Fair Value)
Pass
Analyze
Existing
Goodwill
(GW) and
Intangible
Assets
Finish
No Further
Action
Necessary
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Valuation Analysis of
Intangible Assets - Methodology
July 2006
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Methodology Framework:
Intangible Asset Valuation
Income Approach
Market Approach
Cost Approach
Multi-Period Excess
Earnings Method
Similar Transactions
Method
Replacement or Reproduction
Cost Method
Relief From Royalty Method
Incremental or
Differential Method
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Multi-Period Excess Earnings Method

The principle behind the Multi-Period Excess Earnings Method is
that the value of an intangible asset is equal to the present value of
the incremental after-tax cash flows attributable only to the subject
intangible asset. The incremental after-tax cash flows attributable
to the subject intangible asset are then discounted to their present
value.

Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to
Estimating Fair Value of Assets Acquired—General Discussion”)
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Relief from Royalty Method

The basic tenet of the Relief from Royalty Method is that without
ownership of the subject intangible asset, the user of that intangible
asset would have to make a stream of payments to the owner of the
asset in return for the rights to use that asset. By acquiring the
intangible asset, the user avoids these payments.

Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to
Estimating Fair Value of Assets Acquired—General Discussion”)
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Incremental or Differential Method

Depending on the fact pattern surrounding the valuation of the
subject intangible asset, its value may be determined by isolating
incremental cash flows generated by cost savings or by pricing
premiums. These incremental cash flows are a direct measure of
the benefits derived from ownership of the intangible asset and
would serve as the basis for an estimate of the value of the subject
intangible asset.

Source: AICPA Practice Aid (Chapter 2, “Valuation Approaches to
Estimating Fair Value of Assets Acquired—General Discussion”)
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Commonly Identified Intangible Assets:
Summary of Primary Valuation Methodology
Intangible Asset
Primary Valuation Approach
Primary Valuation Method
Technology
Income Approach
Multi-Period Excess Earnings
Customer Relationships
Income Approach
Multi-Period Excess Earnings
Trademarks
Income Approach
Relief from Royalty
Patents
Income Approach
Relief from Royalty
Covenant not to Compete
Income Approach
Differential Method
Assembled Workforce
Cost Approach
Cost to Re-Create
Goodwill
Residual
Not Applicable
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SEC Areas of Concern on
Fair Value Measurements
July 2006
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SEC Areas of Concern

Primary perspectives and source of questions
 Is the registrant following the published guidance (“following the rules”)?
 What is the registrant’s potential bias?

Process for identifying intangible assets
 Ensuring that all intangible assets apart from goodwill were identified and
considered to be valued
 What was valued? What was not valued?

Valuation methodology
 Expected (“standard”) approaches, methods
 Use of the residual approach to valuation
 Use of the word “residual” in any context other than describing goodwill
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SEC Areas of Concern (cont.)

Lifing assumptions

Consistency with prior valuation analyses

Consistency between publicly-available (and company-internal) information and the
purchase price allocation
 Press releases
 Data found by searching the Internet
 Industry analyst views
 Board presentations
 Reports prepared by financial advisors

Assignment of goodwill to reporting units

Extreme focus on customer related intangibles
 Consistency of Assumptions used in 141 and 142 analyses
 Robust support for assumptions used

Focus on assets valued under the Residual Approach leading to Topic D-108
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Questions?
July 2006
© Copyright 2006.
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Ernst & Young’s Taiwan Contacts
Ernst & Young Transaction Advisory Services, Inc. (EYTAS, TW)
致遠國際財務顧問股份有限公司

Ms. Jenny Chen (陳靖玲 執行董事)

Dr. Ting, Nai-Hsin (丁迺忻 協理)
Partner, EYTAS (Taiwan)
Principal, EYTAS (Taiwan)
Tel: +886-27204000 x 2206
Tel: +886-27204000 x 2510
Cell: 0913-729-593
Cell: 0958-714-715
E-mail: Jenny.Chen002@tw.ey.com
E-mail: NH.Ting@tw.ey.com
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