HILL SCHWARTZ SPILKER KELLER LLC
Dallas CPA Society
7th Annual Education Conference
Valuation and the Audited Financial
Statements
Presented by:
Carla G. Glass, CFA, FASA
May 26, 2011
Preview
HILL SCHWARTZ SPILKER KELLER LLC
 Fair Value Accounting Requirements
 Valuation
 Fair Value in Financial Statements
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Purchase Price Allocations
Impairment Testing
 Working with the Valuation Specialist
 Future?
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HILL SCHWARTZ SPILKER KELLER LLC
Fair Value
Accounting Requirements
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History and Change
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 Rules-Based vs Principles-Based
 Cost-Based vs Value-Based
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Fair Value
HILL SCHWARTZ SPILKER KELLER LLC
 Many accounting requirements reference fair
value measurements (ASC Topic 820):
Defined as - the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.
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Valuation
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Valuation expertise generally necessary
 What Decides Acceptability?
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Standards
Best Practices
Approaches, Methods and Techniques
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Valuation Standards
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Multiple US-based Valuation Professional
Organizations
The AICPA
The Appraisal Foundation
Licensing Laws (Real Estate only)
Non-US Valuation Standards
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Valuation and Accounting – Dialogue
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Appraisal Issues Task Force
Valuation Resource Group of FASB
Valuation Fellows at
• FASB
• SEC
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Valuation Best Practices – Fair Value
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AICPA Practice Aids
• IPR&D
• Shared-Based Compensation
• Impairment
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The Appraisal Foundation
• Contributory Assets
• Valuing Customer Relationships
• Control Value (versus Minority Value)
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Texts and Courses
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Approaches, Methods and Techniques
 Three Approaches
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Cost
Market
Income
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Valuation
HILL SCHWARTZ SPILKER KELLER LLC
 Intangible Assets
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Trade Names
Patents/Technology
Customer Relationships
 Income Approach Methods for Intangible Assets
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Relief from Royalty
With and Without
Excess Earnings (MPEEM)
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HILL SCHWARTZ SPILKER KELLER LLC
Fair Value in
Financial Statements
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HILL SCHWARTZ SPILKER KELLER LLC
Purchase Price Allocations
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Purchase Price Allocation
HILL SCHWARTZ SPILKER KELLER LLC
 ASC Topic 805 – Business Combinations
 ASC Topic 350 – Intangibles – Goodwill and Other
Depreciated cost-based carrying amount
restated to Fair Value
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Purchase Price Allocation
HILL SCHWARTZ SPILKER KELLER LLC
 Is purchase price Fair Value
 Earnouts
 Reporting Units
 Allocated to Fair Value of each asset and liability
 Specific intangible assets - key versus defensive
 Amortizable versus indefinite-lived intangible
assets
 Other contingent liabilities
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Purchase Price Allocation
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 Identifiable Intangible Assets
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Contractual
Separable
Amortizable?
Valuable if Identifiable?
Interrelated nature
Goodwill
INTANGIBLES USUALLY NOT ON BALANCE SHEET IF ORGANIC GROWTH
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Purchase Price Allocation
HILL SCHWARTZ SPILKER KELLER LLC
 Organic versus Acquisition Growth
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Organically – assets on balance sheet at cost,
depreciated or amortized
Acquisitions – (ASC Topic 805) - assets on balance
sheet at “allocated” cost (fair value), depreciated or
amortized
• Tangible asset net amount stepped up to fair value
• Intangible assets put on balance sheet, including goodwill
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Purchase Price Allocation
HILL SCHWARTZ SPILKER KELLER LLC
Accounting For Acquired Assets
Organic
Acquisition
ASSETS
Net working capital
$9,000
$9,000
Land, net
Building, net
Equipment, net
Total PPE
90
1,500
3,900
5,490
200
1,800
5,700
7,700
Identifiable intangible assets
0
15,000
Goodwill
0
20,000
$14,490
$51,700
$8,000
$8,000
Equity
6,490
43,700
TOTAL
$14,490
$51,700
TOTAL
LIABILITIES and EQUITY
Interest-bearing debt
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Purchase Price Allocation
ASSETS
HILL SCHWARTZ SPILKER KELLER LLC
Liabilities and Equity
Current Liabilities
Current Assets
Net Working
Capital
Fixed Assets
Intangible Assets
(Identifiable and
Goodwill)
Interest-Bearing Debt
(Includes current portion and
short-term notes payable)
Invested
Capital
Stockholoders' Equity
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PPA - Highest and Best Use
In Use
HILL SCHWARTZ SPILKER KELLER LLC
In Exchange
A
In Exchange
B
In Exchange
Extreme
EBITDA from Assets
$780
$780
$780
$780
Assets
Land
Building, net
Equipment, net
$200
1,800
5,700
$1,500
500
5,700
$1,500
1,800
5,700
$10,000
570
$7,700
$7,700
$9,000
$10,570
Total
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Purchase Price Allocation
HILL SCHWARTZ SPILKER KELLER LLC
In the end, do your
WACC
and
WARA
Reconcile?
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PPA – Peculiar Results
HILL SCHWARTZ SPILKER KELLER LLC
 Market Participant Assumptions
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Synergies specific to the acquirer
Rational?
 Market Inputs - Timing
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Market inputs in agreed purchase price versus those at
“measurement date”
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HILL SCHWARTZ SPILKER KELLER LLC
Testing for Impairment
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Testing for Impairment
HILL SCHWARTZ SPILKER KELLER LLC
 Impairment tests for indefinite lived assets
(ASC Topic 350 Intangibles – Goodwill and Other)
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Annually
More often if “events or changes in circumstances”
indicate the “asset might be impaired”
Proposed Accounting Standards Update
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Testing for Impairment
HILL SCHWARTZ SPILKER KELLER LLC
 For Goodwill
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Reporting Units
Two-step analysis
• Step 1 – fair value of Reporting Unit
• If fair value less than carrying amount – Step 2
• Step 2 – fair value of all assets
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Note: Only goodwill value subject to change
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Testing for Impairment
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Impairment – Peculiar Results
HILL SCHWARTZ SPILKER KELLER LLC
 What’s More Important?
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Stock market decline
Subject company earnings growth
 What Constitutes Reporting Unit?
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Testing for Impairment
HILL SCHWARTZ SPILKER KELLER LLC
 For “long-lived” assets (ASC Topic 360 Property,
Plant, and Equipment)
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Test for impairment when “events or changes in
circumstances” indicate the “carrying amount may not
be recoverable”
Assets grouped to lowest level at which can identify
independent cash flows
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Testing for Impairment
HILL SCHWARTZ SPILKER KELLER LLC
 For “long-lived” assets (ASC Topic 360)
 Two-step analysis
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Step 1 - undiscounted cash flows relative to carrying
amount
If total less than carrying amount – Step 2
Step 2 – fair value of assets
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HILL SCHWARTZ SPILKER KELLER LLC
Working with the
Valuation Specialist
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Working With Valuation Specialist
HILL SCHWARTZ SPILKER KELLER LLC
 Steps of valuation – typical
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Select valuation specialist
Initial understanding - reporting entity, valuation
specialist, and audit firm
Valuation specialist - data collection and analysis
Results reviewed with reporting entity
Reviewed with audit team
 Securities & Exchange Commission?
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Working With Valuation Specialist
HILL SCHWARTZ SPILKER KELLER LLC
 Accounting, Audit, and Valuation
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Learn common language
Opinionated specialist and opinionated reviewer
Audit firms without in-house valuation specialists
Very little is “typical” or “normal”
 Keep track of
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FASB and IASB documents and exposure drafts
Preferences of each major audit firm
Speeches by SEC staff
Valuation Standards and Best Practices
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Working With Valuation Specialist
HILL SCHWARTZ SPILKER KELLER LLC
 Access to appropriate parties
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Sufficient overall view
Sufficient information about transaction
Specific information about individual asset
 Key assumptions
 Efficiencies
 Be honest
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HILL SCHWARTZ SPILKER KELLER LLC
Future?
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Future?
HILL SCHWARTZ SPILKER KELLER LLC
 Convergence with IFRS
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Currently, relatively little industry-specific
 Certain Priority Projects
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Accounting for Impairment of Financial Assets
Fair Value Measurement (out by now?)
 FASB and IASB
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Chair changes
FASB Increased to 7-person Board – majority vote
IASB 14-person Board –super-majority vote
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Future?
HILL SCHWARTZ SPILKER KELLER LLC
 Equity versus Invested Capital Step One Test
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ASU 2010-28
 Goodwill Impairment Testing
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In future, might be based on “indications” rather than
annually
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HILL SCHWARTZ SPILKER KELLER LLC
Questions?
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HSSK Firm Profile
HILL SCHWARTZ SPILKER KELLER LLC
Real Experts | Real Answers
Hill Schwartz Spilker Keller LLC (HSSK) is a professional services firm devoted to Business Valuation,
Litigation Consulting and Computer Forensics. The principals have been serving the corporate, legal and
professional communities for over thirty years.
Business Valuation
The typical HSSK professional has over twenty years of business or industry experience,
including considerable financial acumen. With expert business skills and exceptional
valuation knowledge, we offer business valuation services to both public and privately owned
companies for a variety of reasons including:
Taxation
Financial Reporting/Regulatory Compliance
Economic Loss/Damages
Dispute Resolution
Transaction and financing Analysis
Financial Restructuring
Healthcare Industry Services
The professionals at HSSK have performed thousands of healthcare valuation and litigation
engagements involving a broad spectrum of businesses including:
Hospitals
Physician Practices
Ambulatory Surgical Centers
Imaging Centers
Renal Centers
Physician Compensation
Various Outpatient Service Facilities
Joint Ventures, Mergers and Acquisitions
HSSK Firm Profile (Cont.)
HILL SCHWARTZ SPILKER KELLER LLC
Litigation Consulting
HSSK's Litigation Consulting professionals have experience in a wide variety of disciplines and
industries. Most have advanced degrees and certifications in areas such as accounting (CPA),
fraud investigation (CFE) and financial forensics (CFF), business valuation (ASA), and electronic
discovery (CCFE). They address the most complicated business litigation issues including
matters relating to:
Economic Damages Analysis
Professional Malpractice
Fraud Investigations and Detection
Minority Oppression and Shareholder
Squeeze-outs
Financial Forensics
Computer Forensics & E-Discovery
Using state of the art technology and forensically sound tools and procedures, including
maintaining the appropriate chain of custody (all evidence is stored in our biometrically
controlled evidence store), we assist clients with electronic discovery and computer forensics
services, throughout the world, including:
E-Discovery Planning
Forensic Acquisition of ESI
ESI Searching and Filtering
Deleted File Recovery
Encryption Bypass
Spoliation Examinations
Remote Forensic Imaging
Recreating Computer Use
HSSK Houston is distinguished as operating the NATION’S FIRST private Computer Forensics lab
accredited by the American Society of Crime Laboratory Directors/Laboratory Accreditation Board
(ASCLD/LAB).
This is not a CPA firm.
Carla G. Glass, CFA, FASA
HILL SCHWARTZ SPILKER KELLER LLC
EXPERIENCE:
Carla Glass has over 25 years of experience in the valuation of businesses, intangible assets, partnerships, employee stock
ownership plans (ESOPs), debt, and derivative securities in a wide range of industries. Her valuation expertise includes
projects completed for financial reporting, gift and estate tax, corporate and partnership reorganizations, minority
shareholder rights, bankruptcy proceedings, merger and acquisition analysis, and litigation, among others.
Carla currently is one of nine valuation professionals serving on the Valuation Resource Group of the Financial Accounting
Standards Board. She also has served as Chair of the Business Valuation Committee of the American Society of Appraisers
(ASA) and also as Chair of the Appraisal Standards Board of The Appraisal Foundation, the Board that writes and
promulgates the Uniform Standards of Professional Appraisal Practice (USPAP).
PROFESSIONAL HISTORY:
2009 to Present: Valuation Managing Director, Hill Schwartz Spilker Keller LLC
Professional services firm specializing in business valuation, litigation consulting, computer forensics, economic and
strategic consulting services.
September 1999 to February 2009: Vice President and Director, American Appraisal Associates
Business valuation for the purpose of estate and gift tax reporting and employee stock ownership plans, intangible asset
appraisals and multi-discipline appraisal projects primarily for financial reporting and tax purposes involving purchase price
allocation and impairment testing, among others. Responsibilities at different times included managing director of Dallas
region financial valuation practice and national leader of closely-held business valuation.
October 1993 to August 1999: Vice President, Corporate Valuations, Inc.
August 1989 to September 1993: Senior Manager, Ernst & Young
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Carla G. Glass, CFA, FASA (Cont.)
HILL SCHWARTZ SPILKER KELLER LLC
PROFESSIONAL AFFILIATIONS:
2001 - 2006: Member, Appraisal Standards Board of The Appraisal Foundation, Vice Chair 2004, Chair 2005
1998 - 2000: Member, CLARENCE Standards Committee (a cooperative effort of the five North American business valuation
professional organizations)
1998 - 2000: Member, Standards Committee for Business Valuation, American Society of Appraisers
1990 - 1999: Member, Business Valuation Committee, American Society of Appraisers, Chair 1995-1997
1990 - 1998: Member, International Education Committee, American Society of Appraisers, Chair 1994-1995
1992 - 1994: Chair, Education Committee for Business Valuation, American Society of Appraisers
1991 - 1992: Chair, 11th Annual Advanced Business Valuation Conference, American Society of Appraisers
PROFESSIONAL HONORS:
Named to American Society of Appraisers’ College of Fellows, which is awarded in recognition of exceptional appraisal proficiency as
well as notable contributions to the valuation profession, 2005
Named to the Valuation Resource Group of the Financial Accounting Standards Board, one of eight valuation professionals
nationwide
Instructor of ASA Principles of Valuation Courses
ACCREDITATIONS & LICENSES:
Chartered Financial Analyst (CFA)
Accredited Senior Appraiser (Fellow), American Society of Appraisers
EDUCATION:
BA, Vanderbilt University
MBA, University of Houston,
This is not a CPA firm
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Thank You
HILL SCHWARTZ SPILKER KELLER LLC
Carla G. Glass, CFA, FASA
Managing Director
Heritage Square II
5001 LBJ Freeway • Suite 300
Dallas, TX 75244-6120
214.741.5360 ext. 103
cglass@hssk.com
www.hssk.com
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