Posts Tagged ‘Assumptions’

The Impact of Market Participant Assumptions on Goodwill Impairment Testing and the Valuation of Intangible Assets for Purchase Price Allocations

The Impact of Market Participant Assumptions on Goodwill Impairment Testing and the Valuation of Intangible Assets for Purchase Price Allocations

At a recent Nashville Chapter of Financial Executives International meeting, the topics included the complexity involved with measuring fair value under two of the Financial Accounting Standards Boards most recent pronouncements in this area – SFAS No. 141R Business Combinations and SFAS No. 157 Fair Value Measurements. Within the January/February 2007 edition of Financial Executive, there is a table entitled – FEI CEOs Top 10 Financial Reporting Challenges. Three of the ten financial reporting challenges listed in that table were as follows:

fair value measurements

complexity in financial reporting and

business combinations

 

Fair Value – SFAS
While SFAS No. 157 coherently explains and defines FASB’s use of fair value in the financial literature, it does not ease the burden of financial executives to implement the standards. For example, a great deal of conversation persists regarding market participants, principal markets, most advantageous markets, etc. These concepts are perhaps a little easier to apply when considering financial assets; however, they are more difficult to implement with intangible assets. Further, there are other issues to consider when applying the standards to intangible assets such as the treatment of expected synergies and whether or not to include some or all of those synergies in the valuation of various assets.

Pronouncement

Effective Date

SFAS No. 157 – Fair Value Measurements

Currently effective for financial assets and financial liabilities

Effective for non-financial assets and non-financial liabilities for fiscal years beginning after November 15, 20081

  SFAS No. 141(R) – Business Combinations

Fiscal years beginning on or after December 15, 2008

Market Participants
There are many considerations that must be addressed when applying SFAS No. 141, SFAS No. 142 (dealing with goodwill and annual impairment testing), and SFAS No. 141(R) under the fair value standard defined by SFAS No. 157. SFAS No. 157 defines fair value as an exit price – or how much value could be obtained upon sale of the asset immediately after acquisition by the reporting entity. A key component in measuring the exit price under fair value is the market participant assumption. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability. Market participants generally are:

Independent of the reporting unit;

Knowledgeable about the asset or liability, the transaction and information that is usual and customary;

Able to transact for the asset or liability; and

Willing to transact for the asset or liability.2

 

While a true marketplace generally does not exist for many of the individual intangible assets that are included in business combinations and sales, the “fair value of the asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. In developing those assumptions, the reporting entity need not identify specific market participants. Rather, the reporting entity should identify characteristics that distinguish market participants generally…”3

Impact of Market Participant Assumption on Goodwill Impairment Testing
One situation in which market participant assumptions frequently impact financial reporting involves goodwill impairment testing. Assume that a group of investors buys a company using the following market participant assumptions identified through a review of public company information:

Projected sales growth;

Projected operating profit margin;

Rate of return for common equity; and

Interest rates.

 

Further, assume that most companies in the industry are leveraged with interest-bearing debt ranging from 25% to 35% of total invested capital, however, also assume that the investor group funds the transaction with 70% debt rather than the range indicated by market participants. Not increasing the required rate of return to account for this higher leverage and related risk to common equity might cause the buyer to face an impairment of the asset soon after acquisition. This is due to the fact that, under SFAS No. 142 and SFAS No. 157, market participants would be expected to value the

Seven Selected Assumptions About Motivational Speakers

The reader is invited to enjoy the following seven assumptions regarding motivational speakers. These assumptions are provided for your amusement as well as your edification.

Assumption #1

Motivational speakers can, in fact, motivate. That is, they can: inspire, energize, rekindle, excite, engender, psych, move, challenge, influence, invigorate, enlighten, encourage and captivate.

Assumption #2

Motivational speakers can, in fact, speak. That is, they can: talk, break silence, open their mouths, emit, utter, articulate, communicate, pipe up, speak up, speak out, hold forth, orate, be eloquent, spell binding and silver-tongued.

Assumption #3

Motivational speakers are the medium and “the medium is the message.” (Marshall McLuhan) That means the message is the sender. Motivational speakers, then, deliver themselves as content. It is their take on something, their spin, their observations, their hypotheses, their slant, their histories, their experiences, their insights, their stories, their challenges, their successes, their failures, their understandings, their sense making, their hopes, their fears, their adversities, their knowledge, their humor. In short, their lives.

Assumptions #4 & #5 & #6

Motivational speakers speak to an audience. (4) The audience is made up of people who want to be there. (5) However, even if the audience is made up of reluctant attendees who were required to participate, they will be won over by the speaker, who, by definition, motivates. (6) The point is there are people who are receiving your message. Some actively listening, some passively listening. Some resonating to your insights, some questioning, perhaps rethinking, long held patterns of thought and behavior. Some moved to laughter, some moved to tears. Some identifying, some examining, some weighing. Each making sense of the words, the message, the speaker in his/her own way.

Assumption #7

Motivational speakers are themselves motivated by the people they are motivating. That is to say that the response, both verbal and nonverbal, from people in the audience renews and refreshes the speaker who is sharing his/her message and therefore him or herself with the audience. This then forms the symbiotic relationship between speaker and listener.

The next time the reader has an opportunity to hear a motivational speaker, think about these assumptions and see if they bear out. And finally, a good writer, like a good speaker, should be clear, direct and concise. Thus, the end.