MACE – Wolfe 9-18-14 Fair Value Acquisition Acctg

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What’s Fair About
Fair Value Acquisition
Accounting?
Presented by W. Michael Wolfe, CPA/ABV, CVA
Fesnak, LLP
[email protected]
Main Line Association for
Continuing Education
September 18, 2014
Acquisition Accounting – Topics for Today
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Evolution of Acquisition Accounting
Evaluating the Acquisition
Recording the Acquisition
Subsequent Impairment Testing
What’s Fair About “Fair Value”
Acquisition Accounting ???
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Acquisition Accounting Skillsets
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Corporate Finance
Business (Enterprise) Valuation
Intangible Asset Valuation
Negotiating
Accounting
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Acquisition Accounting
Evolution of Acquisition Accounting
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Evolution of Acquisition Accounting
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Pre-2002
 Purchase Method (treated all intangibles as goodwill)
 Pooling-of-Interests Method (combining of balance sheets)
 Goodwill amortized up to 40 years
2002
 SFAS 141 Issued – Required Purchase Method Accounting (with
identifiable intangibles recorded at fair value and the residual
recorded as goodwill)
 Goodwill not longer amortized. Instead tested annually for
impairment
 Finite-lived intangible assets amortized
 Indefinite-lived intangible assets tested periodically for
impairment
 SFAS 142 Issued – 2 Step Annual Impairment testing required
with no amortization of Goodwill allowed
 SFAS 157 Issued – Concept of “Fair Value” introduced
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Evolution of Acquisition Accounting
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2011
 Step 0 Introduced – Qualitative Assessment
2012
 Private Company Council (PCC) formed – first agenda items
included Purchase Accounting and Goodwill Impairment
2013
 AICPA issues “FRF for SMEs” – An optional, non-GAAP
accounting framework issued for small/medium sized businesses
not needing to comply with GAAP.
 Private Company Council (PCC) Issues Exposure Drafts on
“Accounting Alternatives” for private companies under GAAP for
Business Combinations and Goodwill for FASB consideration.
 AICPA issues Accounting and Valuation Guide
- Testing
Goodwill for Impairment
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Private Company Council (PCC)
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What is the PCC?
 Formed in 2012 under authorization of Financial Accounting
Foundation (FAF) Board
 A new body established to improve the process of setting
accounting standards for private companies
 Will issue accounting alternatives to GAAP for private
companies
 Will not apply to public companies or non-profits
2 Principal Responsibilities:
 Work jointly with the FASB to decide whether and when
alternatives to US GAAP are warranted for private companies.
 Act as primary advisory body to FASB for appropriate treatment
for private company’s of items under consideration under FASB
technical agenda.
Issued 2 Exposure Drafts in July 2013 related to Purchase
Accounting and GW Impairment.
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Private Company Council (PCC)
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PCC Issue No. 13-01A – Accounting for Identifiable Intangible Assets in a
Business Combination (Topic 805)
 Would allow private companies to elect to only recognize those
intangibles arising from non-cancellable contractual terms or those
arising from other legal rights.
PCC Issue No. 13-01B – Accounting for Goodwill (Topic 350)
 Written into accounting standards early 2014
 Test for goodwill impairment only when a triggering event occurs
rather than the current annual impairment test
 Testing will occur at the enterprise level, not at reporting unit level
 2 Step approach replaced by 1 Step approach
 Goodwill will be amortized not to exceed 10 years
 Effective date - years beginning after 12/15/14.
 Early adoption is permitted.
 May not be appropriate for certain companies, especially those
contemplating an IPO.
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FRF for SMEs
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FRF for SMEs = “Financial Reporting Framework for Small and MediumSized Entities”
Issued by AICPA in 2013
Intended to be responsive to the financial reporting needs of small and
medium-sized entities
Special purpose framework - no official or authoritative status – purely
optional
Financials prepared under this framework may assert that such financials
have been prepared in accordance with the AICPA’s FRF for SMEs
accounting framework.
RFR for SMEs is NOT GAAP.
Intangible Assets acquired in Business Combinations – entities should make
an accounting policy choice:
 Separately recognize Intangible Assets as Identifiable Intangible Assets
or
 Subsume identifiable Intangible Assets into Goodwill
Goodwill:
 Amortize over same period as that used for federal income tax
 If not amortized for tax, then amortize over 15 years
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Acquisition Accounting
Evaluating the Acquisition
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Evaluating the Acquisition
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Read the LOI
Discuss evolution of acquisition with transaction team
Read the Confidential Memorandum
Understand the methodology used to determine the offer
and final price including any forecasts utilized
Identify the most important asset acquired
Read the APA or SPA
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Purchase price
Purchase price adjustments
Earn-outs
Identify assets acquired/liabilities assumed
Review the Addendums (this is where the IP detail usually
resides)
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Evaluating the Acquisition
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How will the Purchase Price be paid?
 Cash
 Notes
 Earn-out payments
 Securities
Is Purchase Price a Market Participant price?
Is there a perception that deal was a bargain
purchase?
Any warrants/options/puts/calls issued at time
of transaction?
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Acquisition Accounting
Recording the Acquisition
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Recording the Acquisition
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Objectives:
Record assets acquired and liabilities assumed at fair value
via a Purchase Price Allocation
 Pass the review process of the external auditors
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Tangible assets:
Accounts receivable – fair value usually book value
 Inventory – fair value is not book value!
 Fixed Assets – fair value may require appraisals
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Intangible Assets:
Identifiable intangibles – Fair value determination of each is
required
 Goodwill – residual value
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Recording the Acquisition
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Common Identifiable Intangible Assets:
Trade Names/Trademarks (indefinite or finite)
 Patents (finite)
 Trade Secrets (indefinite or finite)
 Developed Software (finite)
 Customer Relationships (finite)
 Noncompetition Agreements (finite)
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Useful life of finite-lived intangibles must be
established for GAAP amortization purposes
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Recording the Acquisition
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PPA Process
Establish the IRR inherent in the Transaction.
 WACC analysis – should approximate the IRR.
 Select Risk Rate for each intangible - should be north of
IRR.
 Value the identifiable intangibles.
 Perform a WARA analysis - should result in lowest
returns for tangible assets, higher returns for
identifiable intangibles and highest return for goodwill.
 WARA, IRR and WACC should all agree. Proves that
the intangible values are reasonable.
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Recording the Acquisition
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Valuation of Identifiable Intangibles
 Most important intangible should be valued
using the MPEEM method (a modified DCF).
 Other methods should be used for other
intangibles. Example methods:
 Relief from Royalty
 Cost Replication
 With and Without
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Acquisition Accounting
Subsequent Impairment Testing
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Subsequent Impairment Testing
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Goodwill Impairment Testing Process (ASC 350):
 Step 0 – Qualitative Assessment – May eliminate need
for Step 1
 Step 1 – Test for Goodwill Impairment – Compare
Enterprise Value to Carrying Value. If EV is less than
CV, proceed to Step 2. If not, GW is assumed not
impaired.
 Step 2 – Determine amount of Impairment – Purchase
accounting exercise “as if” company was re-acquired.
If residual goodwill is less than its carrying value, an
impairment charge is recorded.
Test by Reporting Unit
Test Annually
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Subsequent Impairment Testing
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Impairment Testing – Other Intangibles:
 Indefinite-lived intangibles - ASC 350 contains more
procedures than just a goodwill test:
 Indefinite lived assets (such as trade names) are tested
directly for impairment annually (or upon a triggering
event). If FV is less than CV, impairment is indicated,
and the asset is written down to its fair value
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Finite-lived intangibles – tested under ASC 360:
 If sum of undiscounted cash flows is greater than CV, no
impairment is assumed to exist.
 If sum of undiscounted cash flows is less than CV, value is
determined by discounted cash flow. If value is less than
CV, then impairment is indicated. May be tested with an
asset group.
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Acquisition Accounting
Thank You for Attending !!!
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