Fair Value Measurements : Practical Guidance and Implementation

by Mark L. Zyla

• ISBN13: 9780470500248
• ISBN10: 0470500247
• Format: Hardcover
• Copyright: 2009-12-01
• Publisher: Wiley

Summary

Praise for Fair Value Measurements: Practical Guidance and Implementation"Writing Fair Value Measurements was a monumental task fraught with controversy not only in the U.S. but also abroad.? Having coauthored a book with Mark as well as written one myself, I was even more impressed that Mark was able to navigate these fair value minefields and produce a work that will be a tremendous help to accountants and non-accountants alike.? If you are looking for a 'one-stop' book on fair value measurements, this is it!" -Neil J. Beaton, CPA/ABV, CFA, ASA, National Partner in Charge, Valuation Services, Grant Thornton LLP"In recent years, the FASB and the IASB have added many requirements for various assets and liabilities to be measured at fair value. ?In this book, Zyla clearly describes how to implement these fair value measurements and how investors and creditors should interpret them. The crisp writing and illuminating analysis will help readers to grasp the essence of fair value accounting and to apply it wisely." -J. Edward Ketz, Associate Professor of Accounting, Pennsylvania State UniversityA hands-on guide for financial executives needing to understand the fair value measurement processIn basic, nontechnical language, Fair Value Measurements: Practical Guidance and Implementation will help all financial executives and auditors succeed in understanding the fair value accounting rules that corporations must follow. The result is a resource that professionals can rely on to understand the importance of valuation and the concepts that define it.Filled with practical direction for best practices of financial valuation as well as for understanding the many FASB pronouncements involving fair value, Fair Value Measurements: Practical Guidance and Implementation brings senior-level executives up to speed on what fair value really means.

Author Biography

Mark L. Zyla, CPA/ABV, CFA, ASA, is currently Managing Director of Acuitas, Inc., an Atlanta, Georgia–based valuation and litigation consultancy firm, providing valuation consulting for various types of entities for the purposes of mergers and acquisitions, financial reporting, tax planning, corporate recapitalizations, as well as valuing various types of intellectual property and other intangible assets. Mark frequently writes and speaks on the issue of fair value in financial reporting. He is coauthor of the AICPA courses "Fair Value Accounting: A Critical New Skill for All CPAs" and "Valuing Goodwill and Other Intangible Assets." He is a coauthor of the International Glossary of Business Valuation Terms, which has been adopted by major valuation organizations. He is a member of the AICPA's Fair Value Resource Panel and is a current member of the AICPA's Impairment Issues Task Force. Mark was also the chairman of the AICPA's first conference on fair value measurements. He was also the vice chairman of the Appraisal Foundation's first Best Practices for Valuation in Financial Reporting Intangible Asset Working Group. He has been on the faculty of the National Judicial College, teaching business valuation to judges. Mark lives in Atlanta, Georgia, with his wife, Jo Ann, and his son, Jack.

Table of Contents

Preface	p. xiii
Acknowledgements	p. xvii
About the Author	p. xix
Fair Value Accounting	p. 1
Introduction	p. 1
History of Fair Value in Financial Reporting	p. 2
SFAS 157, Fair Value Measurements	p. 11
SFAS 159, Fair Value Option	p. 31
Conclusion	p. 33
Notes	p. 33
Fair Value Accounting and the Current Economic Crisis	p. 37
Mark-to-Market Accounting	p. 38
Fair Value Measurement Concepts	p. 39
The Accounting Implications of Fair Value Measurements in Illiquid Markets	p. 39
Application of Fair Value Accounting in Illiquid Market	p. 40
FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active	p. 42
Study on Mark-to-Market Accounting	p. 46
Conclusion of the Report	p. 46
New FASB Project to Improve Measurement and Disclosure of Fair Value Estimates	p. 48
Additional FASB Staff Positions (FSPs) to Improve Guidance on Fair Value Measurements and Impairments	p. 49
Financial Crisis Advisory Group (FCAG)	p. 54
Conclusion	p. 55
Notes	p. 56
Fair Value Measurements in Business Combinations and Subsequent Testing for Impairment	p. 59
Accounting for Business Combinations	p. 6
Subsequent Accounting for Goodwill and Other Intangible Assets	p. 71
Conclusion	p. 85
Notes	p. 86
The Nature of Intangible Assets	p. 89
History of Intangible Assets	p. 90
Economic Basis of Intangible Assets	p. 91
Identification of Intangible Assets	p. 92
Examples of Specific Intangible Assets	p. 93
Types of Intangible Assets	p. 96
Useful Life of an Intangible Asset	p. 99
Intangible Assets and Economic Risk	p. 100
Economic Balance Sheet	p. 101
Valuation Techniques	p. 102
Conclusion	p. 106
Notes	p. 107
The Cost Approach	p. 111
The Cost Approach Under FASB ASC 820, Fair Value Measurements and Disclosures (SFAS No. 157)	p. 112
Economic Foundation for the Cost Approach	p. 115
Cost versus Price versus Fair value	p. 115
The Role of Expected Economic Benefits in the Cost Approach	p. 117
Reproduction Cost Versus Replacement Cost	p. 118
Components of Cost	p. 119
Obsolescence	p. 121
The Relationships among Cost, Obsolescence, and Value	p. 121
Physical Deterioration	p. 123
Functional (Technological) Obsolescence	p. 124
Economic (External) Obsolescence	p. 125
Applying the Cost Approach	p. 127
Taxes under the Cost Approach	p. 132
Limitations of the Cost Approach	p. 133
Conclusion	p. 134
Notes	p. 134
The Market Approach	p. 137
Introduction	p. 137
Applying the Market Approach in Measuring the Fair Value of an Entity or Reporting Unit of an Entity	p. 139
Conclusion	p. 170
Notes	p. 170
The Income Approach	p. 171
Introduction	p. 171
Discounted Cash Flow Method	p. 172
Multiperiod Excess Earnings Method	p. 177
FASB Concepts Statement 7	p. 193
Rates of Return under the Income Approach	p. 195
The Income Increment/Cost Decrement Method	p. 200
Profit Split Method	p. 201
Build-Out Method, or "Greenfield Method" (With and Without)	p. 206
Weighted Average Cost of Capital Calculation	p. 206
Conclusion	p. 214
Notes	p. 215
Advanced Valuation Methods for Measuring the Fair Value of Intangible Assets	p. 217
Introduction	p. 217
Limitations of Traditional Valuation Methods	p. 217
Real Options	p. 219
Using Option Pricing Methodologies to Value Intangible Assets	p. 222
Black-Scholes Option Pricing Model	p. 226
Binomial or Lattice Models	p. 228
Monte Carlo Simulation	p. 234
Decision Tree Analysis	p. 236
Conclusion	p. 239
Notes	p. 239
Measuring the Remaining Useful Life of Intangible Assets in Financial Reporting	p. 241
Introduction	p. 241
FASB Guidance on Determining the Remaining Useful Lives of Intangible Assets	p. 244
Guideline Useful Lives	p. 248
Conclusion	p. 249
Notes	p. 249
Fair Value Measurements of Private Equity and Other Alternative Investments	p. 251
Introduction	p. 251
AICPA's Alternative Investment Task Force	p. 252
Accounting Standards Update No. 2009-12, Investments in Certain Entities That Calculated Net Asset Value Per Share (or Its Equivalent)	p. 258
Updated U.S. Private Equity Valuation Guidelines	p. 260
Common Valuation Methodologies of Measuring the Fair Value of the Fund's Investment Portfolio	p. 261
Conclusion	p. 262
Notes	p. 263
Fair Value Measurement Under IFRSs	p. 265
Convergence of U.S. GAAP and IFRSs	p. 266
SEC Road Map to IFRSs	p. 267
The IASB's Fair Value Measurement Project	p. 269
IFRSs in Business Combinations and Impairment Testing	p. 271
IAS 38 Intangible Assets	p. 275
Impairment of Intangible Assets Held for Use	p. 276
International Valuation Standards Council	p. 277
IFRS for Small and Medium Size Entities (SME)	p. 279
Conclusion	p. 279
Notes	p. 279
Disclosures in Fair Value Measurements	p. 281
Introduction	p. 281
The Role of Disclosures	p. 282
Disclosures under FASB ASC 820, Fair Value Measurements and Disclosures (SFAS No. 157)	p. 283
Fair Value Disclosures in Business Combinations and in Subsequent Impairments of Goodwill and Other Intangibles	p. 288
SEC Suggested Disclosures	p. 292
FAS 157'Improving Disclosures about Fair Value Measurements	p. 294
Conclusion	p. 296
Notes	p. 297
Auditing Fair Value Measurements	p. 299
Introduction	p. 299
The Audit Process	p. 300
Auditing Estimates in Fair Value Measurements	p. 303
AU Section 328 (SAS 101), Auditing Fair Value Measurements and Disclosures	p. 306
Testing Management's Fair value Measurements	p. 308
Testing Management's Significant Assumptions, the Valuation Model, and the Underlying Data	p. 310
Testing the Reliability of Management's Assumptions	p. 310
Should an Auditor Engage a Valuation Specialist?	p. 313
PCAOB Staff Audit Practice Alert No. 2, Matters Related to Auditing Fair Value Measurements of Financial Instruments and the Use of Specialists	p. 313
SEC Audit Guidance	p. 317
Nonauthoritative Guidance	p. 317
The Appraisal Guidance	p. 318
Appraisal Issues Task Force (AITF)	p. 319
Conclusion	p. 320
Notes	p. 321
Fair Value Measurement Case Study	p. 323
Learning Objectives	p. 323
Business Background and Facts-Software	p. 323
Suggested Case Study Solutions	p. 371
Information Request-SEAS 142	p. 399
Information Request for Business Combinations-SEAS 141R	p. 401
Glossary of International Business Valuation Terms	p. 405
Bibliography	p. 415
Index	p. 427
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