Transcript Fair Value Measurements: What is the Latest?

Fair Value Measurements: What
is the Latest?
Mark L. Zyla CPA/ABV, CFA, ASA
Acuitas, Inc.
Accountants One Seminar
March 10, 2010
Objectives of the Presentation
• Trends Toward Fair Value Measurement in Financial Reporting
• Overview of Fair Value Accounting – SFAS 157, Fair Value
Measurement (ASC 820)
• Update on the latest GAAP and GAAS pronouncements, including
Implementation Issues related to SFAS 157, Fair Value Measurement
– Fair Value Measurement and the Current Credit Crisis
– Implementation Issues for SFAS 141(R) Business Combinations (ASC
805)
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Fair Value Measurements and IFRS including SME’s
Fair Value and Alternative Investments
Fair Value and Not for Profits
Status of the Valuation Profession’s “Best Practices”
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The Trends Toward Fair Value
Accounting
• The changing economic environment facing business today
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The Information Revolution
Global competition
Wall Street “expectations”
Complexity of financial transactions
• Trend towards increasing regulation
– Passage of Sarbanes Oxley Act in 2002
– The establishment of the PCAOB
– The focus of the SEC on transparency
• The FASB and IASB Convergence Project
• The implementation of Fair Value Accounting in US GAAP
– Principles Based Accounting versus
Rules Based Accounting
For additional information see Fair Value Measurements: Practical Guidance and
Implementation, John Wiley & Sons
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Rule Making Bodies that Influence Accounting
Standards Such as GAAP
• Financial Accounting Standards Board ( FASB)
• International Accounting Standards Board
( IASB)
• Security and Exchange Commission (SEC)
• Public Company Accounting Oversight Board
( PCAOB)
• American Institute of Certified Public
Accountants (AICPA)
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The Global Public Policy
Symposium
• Sponsored by the six largest international
accounting firms including the Big Four plus
BDO and Grant Thornton
• Goal: To provide an international forum for
collaboration to maintain healthy capital markets
and to improve the quality, reliability and
accessibility of financial and other information
that stakeholders need.
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Global Capital Markets and the Global
Economy: A Vision from the CEOs of the
International Audit Networks
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White Paper written November 2006 by the Global Public Policy
Symposium
Six Elements relating to audits that the accounting profession should be
addressing:
– Investor needs for information
– Roles of various stakeholders
– The auditing profession
– A new business reporting model
– Large, collusive frauds are rare
– Information is reported and audited pursuant to globally consistent
standards
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SEC Recent Releases
• Release No. 33-8818, Acceptance from Foreign Private Issuers of
Financial Statements Prepared in Accordance with International
Financial Reporting Standards Without Reconciliation to U.S. GAAP
( Issued July 2, 2007)
– November 15, 2007 SEC voted unanimously to eliminate
reconciliation requirement for foreign issuers.
– November 29, 2007 EU Commissioner called on the body to
eliminate reconciliation requirement for U.S. GAAP issuers
– Dual reporting system
• Release No. 33-8831, Concept Release on Allowing U.S. Issuers to
Prepare Financial Statements in Accordance with International
Financial Reporting Standards ( Issued August 7, 2007)
– Comment Period recently ended
– AICPA comment letter recommended SEC allow
U.S. firms report using IFRS
– Never finalized
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Roadmap for the Potential Use of Financial
Statements Prepared in Accordance with
International Financial Reporting Standards
by U.S. Issuers
• SEC Release No. 33-8982, issued November 28, 2008
• SEC demonstrates its support for the FASB and IASB
Convergence Project through this release
• Would require U.S. issuers to use IFRS by 2014, if
milestones are achieved
• Comment period was recently extended
• SEC has recently expressed a possibility of extending
implementation to 2015.
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ASC 820 Fair Value Measurements and
Disclosures (SFAS 157) - Effective Dates
• Note: Revised by the FASB on November 14th 2007
• Effective for Fiscal Years beginning After November 15,
2007
– Financial assets and liabilities
– Other assets and liabilities carried at fair value on a recurring
basis
– Examples include derivatives, loan-servicing assets and
liabilities, and some loans and debt linked to business
combinations.
• One year deferral (November 15, 2008)
– Nonfinancial assets and liabilities
– Examples include nonfinancial assets and liabilities related to
business combinations such as goodwill and intangible
assets, and discontinued operations
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SFAS 157 Fair Value
Measurements (ASC 820)
• Statement provides a framework for Fair Value
Measurements
• Changes the Definition of Fair Value
• Further elaborated on the concept of Market
Participants
• Introduced Principal Market and Most
Advantageous Market
• Introduced the concept of Fair Value Hierarchy
• Introduced the concept of defensive value.
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Definition of Fair Value
Fair Value is 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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Fair Value Hierarchy
• Level 1 – Quoted prices in active markets
for identical assets or liabilities
• Level 2 – Inputs other than quoted prices
that are observable, either directly or
indirectly
• Level 3 – Unobservable inputs based on
best information available in the
circumstances
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SFAS 159,The Fair Value Option
(ASC 825)
• Relates only to certain financial instruments
• All entities can choose to measure eligible
items at fair value.
• Resulting unrealized gains and losses will
be reflected in earnings
• May be applied instrument by instrument
• Is irrevocable
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Fair Value Measurement and the
Credit Crisis
“Accounting rules require banks to value
many assets at something close to a very
low fire-sale price rather than the hold-to–
maturity price.”
Federal Reserve Chairman Ben S. Bernanke testimony to the
Senate Banking Committee on September 23, 2008
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Responses to the Credit Crisis
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SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
FOR IMMEDIATE RELEASE 2008-234
September 30, 2008
Joint Statement The Center for Audit Quality,
The Council of Institutional Investors and
The CFA Institute
Opposing Suspension of Mark-to-Market Accounting (October 1, 2008)
CFA Institute Official Position on
Fair Value Reporting
FSP FAS 157-3 (ASC 820-10-35),
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active
(Issued October 10, 2008)
SEC’s “Mark to Market”
Accounting Study
(Issued December 30, 2008)
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly (ASC 820-10-55-4) March 2009
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SEC’s “Mark to Market”
Accounting Study
(Issued December 30, 2008)
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The SEC study outlines eight recommendations:
– FASB Statement No. 157 should be improved, but not suspended
– Existing fair value and mark-to market requirements should not be
suspended
– While the Staff does not recommend a suspension of existing fair value
standards, additional measures should be taken to improve the application
and practice related to existing fair value requirements (particularly as they
relate to both Level 2 and Level 3 estimates)
– The accounting for financial asset impairments should be readdressed
– Implement further guidance to foster the use of sound judgment
– Accounting standards should continue to be established to meet the needs
of investors
– Additional formal measures to address the operation of existing
accounting standards in practice should be established
– Address the need to simplify the accounting for
investments in financial assets
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FSP FAS 157-3 (ASC 820-10-35),
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active
(Issued October 10, 2008)
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Fair value measurement represents the price at which a transaction would
occur between market participants at the measurement date. ( An exit price).
Determining fair value in a dislocated market depends on the facts and
circumstances and may require the use of significant judgment about whether
individual transactions are forced liquidations or distressed sales.
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…the use of the reporting entity’s own assumptions about future cash lows and
appropriately risk-adjusted discount rates is acceptable when relevant
observable inputs are not available.
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Broker ( or pricing service) quotes may be an appropriate input when
measuring fair value, but are not necessarily determinative is an active market
does not exist for the financial assets.
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Amends Statement 157 for paragraphs A32A-A32F for an
example that illustrates these concepts
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FASB Credit Crisis Projects
• FASB added projects in response to SEC
recommendations from the Mark to Market
Accounting Study
• Five completed projects to date
– FSP FAS 157-4, Determining Fair Value
When the Volume and Level of Activity for the
Asset or Liability Have Significantly
Decreased and Identifying Transactions that
Are Not Orderly (codified as 820-10-65)
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FASB Credit Crisis Projects
• Completed Projects
– FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments
(ASC 350-50-1 & 2)
– FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (ASC 82510-65)
– Accounting Standards Update (ASU) 2009-05 (ASC
820), Measuring Liabilities at Fair Value, originally
proposed as FSP FAS 157-c, then as 157-f
– ASU 2009-12 (ASC 820), Investment in Certain
Entities that Calculate Net Asset Value per Share (or
Its Equivalent), originally FSP FAS 157-g
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FSP FAS 157-4, Determining Fair Value
When the Volume and Level of Activity for
the Liability Have Significantly Decreased
and Identifying Transactions That Are Not
Orderly (ASC 820-10-55-4)
• Step One – Determine whether there has
been a significant decrease in the volume
and level of activity. If so, quoted prices
may not be determinative of fair value
• Step Two – Determine whether the
transaction is orderly, or not
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FSP 157-4: The Transaction Price
• When the transaction is not orderly, place little or no weight on the
transaction price
• When the transaction is orderly,
– Consider the transaction price
– Adjustments to transaction price may be appropriate
– Weight given to transaction price vs. other indications of fair value
depends on
• Facts and circumstances
• Relative volume
• Proximity of transaction date to measurement date
– FV should reflect appropriate risk premium for uncertainty in cash flows
• If insufficient evidence to conclude whether orderly or not
– Transaction price shall be considered
– Transaction price may not be the sole or primary basis for fair value
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FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of
Financial Instruments (ASC 825-10-65)
• Requires disclosure about the fair value of
financial instruments in interim and annual
financial statements
– When any summarized financial information is
presented
– Can report fair value in the body of financial
statements or in footnotes
– Fair value must be presented with carrying value
– Methods and assumptions must be disclosed
– Purpose is to improve transparency & quality
– Financial instruments reported using different
measurement attributes in GAAP
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Accounting Standards Update (ASU)
No. 2009-05, Measuring Liabilities at
Fair Value (Topic 820)
• Quoted market price of an identical liability is the
best evidence of fair value (Level 1)
• If not available, maximize the use of relevant
observable inputs and minimize unobservabel
inputs
– Quoted price of an identical liability traded as an
asset
– Quoted prices for similar liabilities or similar liabilities
traded as assets
– Another valuation technique – income or market
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Accounting Standards Update (ASU)
No. 2009-05, Measuring Liabilities at
Fair Value
– FV of a liability measured using the price of
the liability when traded as an asset also
Level 1
– Quoted prices for liabilities traded as assets
may require adjustments for
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Condition or location of the asset
Degree of comparability
Level and volume of activity
Adjustments will cause fair value to be lower than
Level 1
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Accounting Standards Update (ASU)
No. 2009-05, Measuring Liabilities at
Fair Value
– Contractual restriction on the transfer of a
liability is already included in the transaction
price
– No adjustment to inputs based on a
contractual restriction on the transfer of a
liability is warranted
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Accounting Standards Update (ASU)
No. 2009-12, Investment in Certain
Entities that Calculate Net Asset Value
per Share (or Its Equivalent) Topic 820
– Applies to investments measured or disclosed
at fair value that do not have readily
determinable fair values, such as
investments in:
• hedge funds, private equity funds, real estate
funds, venture capital funds and fund of funds
– Permits the entity to measure fair value of an
investment on the basis of net asset value as
a practical expedient
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Accounting Standards Update (ASU)
No. 2009-12, Investment in Certain
Entities that Calculate Net Asset Value
per Share (or Its Equivalent)
– To qualify, the investment must:
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Have investment activity
Have unit ownership
Have pooling of funds
Be the primary reporting entity
– Required disclosures, by major category of
investment
• Nature of any restriction on redemption
• Any unfunded commitments
• The investment strategy
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SFAS 141(R)
Business Combinations
(ASC 805)
The Acquisition Method
Under Statement 141(R) (ASC 805), all business
combinations will be accounted for by applying the
“acquisition method.”
Applying this method requires:
• Identifying the acquirer;
• Determining the acquisition date and purchase price;
• Recognizing at their acquisition-date fair values the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquiree; and
• Recognizing goodwill or, in the case of a bargain
purchase, a gain.
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Key Provisions Under
The Acquisition Method
 The acquirer is the entity that obtains control of the
acquiree. The acquiree is a business or businesses
that the acquirer obtains control of in a business
combination.
 The acquisition date is the date on which the acquirer
obtains control of the acquiree.
 The fair value of the business combination will be
measured at the fair value of the business acquired.
 Transaction related costs will be expensed rather
than capitalized.
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Key Provisions Under
The Acquisition Method
 The fair value of the business combination will be
measured at the fair value of the business acquired.
 Contingent consideration usually is an obligation of
the acquirer to transfer additional assets or equity
interests to the former owners of an acquiree as part
of the exchange for control of the acquiree if specified
future events occur or conditions are met.
 Contingent consideration is recognized at its fair value
as of the acquisition date.
 Transaction related costs will be expensed rather
than capitalized.
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Key Provisions Under
The Acquisition Method
 Acquisition-related and restructuring costs are to be
accounted for separately from the business combination
and generally recognized as expenses when incurred.
 Acquired in-process research and development (IPR&D)
will be capitalized
 Certain contingent assets and liabilities will be
recognized at fair value.
 Goodwill is an asset representing the future economic
benefits arising from other assets acquired in a business
combination that are not individually identified and
separately recognized.
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Indentified Assets in a Business
Combinations
• Under Topic ASC 805 Business
Combinations ( formerly SFAS 141(R)),
and asset is considered “identifiable” in a
business combinations if it meets one of
two criteria:
– If it is separable, either by itself of part of an
asset group and can be monetized in some
manner or
– If it is part of a contractual agreement.
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FASB FSP 141(R) – 1
Accounting for Assets and Liabilities Assumed in a
Business Combination that Arise from
Contingencies (ASC 805-20)
• If the acquisition date fair value can be determined before the end of
the measurement period, the acquisition date asset or liability shall
be recognized
• If the acquisition date fair value can not be determined before the
end of the measurement period, the asset or liability shall be
recognized if both criteria are met:
1. Information available before the end of the measurement period
indicates that it is probable that an asset existed or a liability had
been incurred at the acquisition date, and
2. The amount of the asset or liability can be reasonably estimated.
• If both conditions are not met, do not recognize the
asset or liability.
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Fair Value and Not for Profits
• Statement 164, Not-for-Profit Entities:
Mergers and Acquisitions
– How it compares to Statement 141(R)
• Similarities (The Acquisition Method)
• Differences (Recognition of Goodwill)
– Two types of not-for-profit entities
• Those that are solely or predominately supported by
contributions and returns on investments
• Those the receive support from fees for services (more
“businesslike”)
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Business Combinations for Not
for Profit Entities
FASB recently issues Statement No. 164
in an effort to clarify M&A transactions
among non-profits. According to the FASB,
the statement aims to:
“improve the relevance, representational
faithfulness and comparability of the information
that a not-for-profit entity provides in its financial
reports about a combination with other not-forprofit entities, businesses or non-profit activities
by establishing principles and requirements.”
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Business Combinations for Not
for Profit Entities
• The Statement provides guidance on “how a not-for-profit entity:
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Determining when a combination is a merger or an acquisition
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Applying the carryover method in accounting for a merger
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Applying the acquisition method in accounting for an acquisition,
including identifying the acquirer between or among the combining
entities
• Determining the information to disclose to allow users of financial
statements to evaluate the nature and financial effects of a
combination”
• Statement 164 takes effect for mergers whose initial reporting period
is on or after Dec 15, 2009 and for acquisitions whose 1st annual
reporting period begins on or after December 15, 2009 and early
applications are not permitted. The only way to make clear
accounting disclosures is to ensure that your financial statements
conform to these new standards
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Business Combinations for Not
for Profit Entities
 SFAS 164 distinguishes between a Merger and an Acquisition
 Mergers accounted for on ‘carryover basis’ - similar to pooling accounting under
APB 16
 Acquisitions accounted for on ‘acquisition basis’ - similar to SFAS 141(R)
 Determining factor of a merger: ceding of control by the governing bodies of
two (or more) organizations to a new organization; the governing board of the
new entity must be newly formed, but establishing a new legal entity is not a
requirement
 Other factors such as relative size, relative dominance of the process and of the
combined entity, and relative financial health, can be considered in judging
whether control has been ceded, but are not themselves determinants of a
merger vs. an acquisition
 All other combinations are acquisitions
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Business Combinations for Not
for Profit Entities
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Identifiable assets and liabilities (and any noncontrolling interest) of the acquired entity are
brought in at their fair values at date of acquisition
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If the value of the acquired assets exceeds the sum of the acquired liabilities plus any
consideration, the difference is recorded as an inherent contribution and reported as a separate
credit in the statement of activities
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If the sum of the liabilities plus consideration exceeds the assets, the difference is recorded as
goodwill, except:
if the entity is predominantly supported by contributions and/or investment return, the goodwill is
written off immediately as a separate charge in the statement of activities (‘predominantly supported
by’ means that contributions and investment return are expected to be significantly more than the total
of all other revenues)
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Fee for service entities are treated in a manner similar to SFAS 141 (R)
Topic ASC 350 ( SFAS 142) Goodwill Impairment has been emended to include Not for Profit
Entities
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Common Fair Value Implementation
Issues
• Large differences between income and market
approaches in impairment testing.
• Identification of market participants
• Developing discount rates on a market participant basis
• Comparison of the fair value indications from the cost
approach and the income approaches
• Consideration of EITF 02-13 factors in impairment
testing
• Unit of account in impairment testing of long lived assets
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Valuation Profession Best Practices
Update
• AICPA
– Impairment Task Force
– Equity as Compensation Task Force
– IPR& D Task Force
• Appraisal Foundation
– Contributory Asset Charges
– Customer List
– Control Premium
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Valuation Profession Best Practices
Update
• Valuation Resource Group of the FASB
• Appraisal Issues Task Force
• Training and Education
– AICPA’s Fair Value Measurement Conference
Chicago June, 2010
– AICPA’s Fair Value Measurements Workshop Dallas,
February 2010
– ASA’s Valuation of Intangible Assets for Financial
Reporting Purposes (BV301)
– AICPA courses Fair Value Accounting and Accounting
for Goodwill and Other Intangible Assets
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Questions?
Mark L. Zyla, CPA/ABV, CFA, ASA
Mark L. Zyla is a Managing Director of Acuitas, Inc. an Atlanta Georgia based valuation and litigation consultancy firm. Mark
has provided valuation consulting for various types of entities for a wide variety of purposes.
Mark received a BBA degree in Finance from the University of Texas at Austin and an MBA degree with a concentration in
Finance from Georgia State University. Mark also completed the Mergers and Acquisitions Program at the Aresty Institute of
The Wharton School of the University of Pennsylvania and the Valuation Program at the Graduate School of Business at
Harvard University. He is a Certified Public Accountant, Accredited in Business Valuation (“CPA/ABV”), Certified in
Financial Forensics (“CFF”) by the AICPA, a Chartered Financial Analyst (“CFA”), and an Accredited Senior Appraiser with
the American Society of Appraisers certified in Business Valuation (“ASA”).
Mark is a member of the American Society of Appraisers (“ASA”), the American Institute of Certified Public Accountants
(“AICPA”), and the CFA Institute. He was named as Vice Chairman of The Appraisal Foundation’s Business Valuation Best
Practices Working Group on Contributory Asset Charges and to the AICPA’s Fair Value Resource Panel. He is currently
working on the AICPA’s Impairment Practice Aid. He is also the Chairman of the AICPA’s Fair Value Measurement Conference
Committee. Mark is a former member of the Business Valuations Committee of the AICPA, and a former Chairman of the
ABV Examination Committee of the AICPA. He is also a former member of the Business Valuation Standards Subcommittee
of the ASA.
Mark is a frequent presenter and author on valuation issues. Mark is the co-author of the courses, “Fair Value Accounting: A
Critical New Skill for All CPAs” and “Accounting for Goodwill and Intangible Assets” published by the AICPA. He is the author of
Fair Value Measurements: Practical Guidance and Implementation which has just been published by John Wiley & Sons.
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Mark L. Zyla CPA/ABV, CFA, ASA
Managing Director
Acuitas, Inc.
One Midtown Plaza, Suite 950
Atlanta, Georgia 30309
(404) 898-1137
[email protected]