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The Professional's Guide to Fair Value: The Future of Financial Reporting

ISBN: 978-1-118-18542-1
256 pages
January 2012
The Professional
An all-encompassing guide to the elements and basics of fair value

With the important role fair value is playing in the creation of a converged set of global accounting standards, demand for products in this category is growing spectacularly. The elements and basics of fair value are covered, including risk, dealing with the SEC, and details on legal responsibility. In addition, sample financial statements are included, along with tables, recommended applicable techniques, and management checklists for those who are responsible for preparing and approving of financial statements.

  • Written by the Chairman and co-CEO of the International Association of Consultants, Valuators and Analysts (IACVA)
  • Includes sample financial statements of both U.S. and foreign companies

Appropriate for anyone involved professionally with finance—managers, accountants, investors, bankers, instructors, and students—The Professional's Guide to Fair Value is a reliable reference on the ins and outs of fair value financial disclosure.

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Preface xi

Acknowledgments xv

Chapter 1: Significance of Value 1

Business Uses for Valuation 2

Mergers and Acquisitions 2

Financial Reporting 3

Investment Bankers versus Valuators 8

Valuation Requirements 8

Litigation Risks 9

Ten Commandments of Valuation 10

Chapter 2: Fair Value Concept 13

Relevant Pronouncements 14

Definitions 14

Market Participants 15

Fair Value Accounting 16

Revaluation under IFRS 16

Other Types of Value 17

Valuation Principles 19

Reporting and Cash-Generating Units 20

Chapter 3: Fair Value Framework 21

Stage 1: Determine the Unit of Account 22

Stage 2: Evaluate the Premise of Value 24

Stage 3: Assess the Principal Market 29

Stage 4: Establish the Most Advantageous Market 30

Stage 5: Select Appropriate Valuation Methods 33

Stage 6: Estimate Fair Value Conclusions 37

Chapter 4: Taming the Future 41

Definitions 42

Effect of Market Participants’ Assumptions 43

Scenario Analysis 45

Scenario Implications 49

Chapter 5: Projecting What Is to Come 53

Base the Future on the Past 54

The Truth Is in the Parts 56

Avoid Unnecessary Risks 59

Garbage In, Garbage Out 63

Believable and Likely Conclusions 66

Quality of Earnings 67

Conclusion 68

Chapter 6: The Market Approach to Fair Value 69

Nature of Markets 70

Classifying Assets 72

Comparable Transactions 74

Guideline Entities 76

Guideline Entities Example 79

Licensed Asset Example 82

Conclusion 84

Chapter 7: The Cost Approach to Fair Value 85

Current Replacement Cost 85

Deductions 87

Integrating the Factors 90

Residual Value 92

Useful Lives 92

Valuing Intangible Assets by the Cost Approach 97

Conclusion 103

Chapter 8: The Income Approach to Fair Value 105

Capitalization Methods 106

Income Approach—Discounting 110

Terminal Amounts 115

Application to Intangible Assets 116

Chapter 9: Sources of Value—Profits 121

Structure of Businesses 121

Innovation 122

DuPont Analyses 129

Chapter 10: Sources of Value—Risks 135

Reducing Risks 136

Continual Monitoring and Testing 136

Dealing with Biases 138

Risk Rate Component Model 139

Intellectual Capital Value Drivers 146

Conclusion 147

Chapter 11: Valuing Liabilities 149

Liabilities Transferred Rather Than Settled 150

Asset Retirement Obligations 157

Contingent Liabilities 158

Chapter 12: Business Combinations 161

Do Mergers Pay Off? 162

Why Merge? 163

Determination of Synergies 166

Intrinsic and Investment Values 167

Quantification 167

Chapter 13: Purchase Price Allocation 173

Stage 1: Determine the Acquirer 174

Stage 2: Establish the Consideration’s Fair Value 176

Knowledge of the Industry 178

Stage 3: Identify All the Items Involved 180

Stage 4: Select Appropriate Valuation Techniques 188

Stage 5: Estimate Fair Values and Reconcile Rates of Return 190

Conclusion 192

Chapter 14: Impairment 193

Reporting Units 194

Cash-Generating Units 196

Goodwill 197

Allocations 198

GAAP Long-Lived Assets Impairment Test 198

IFRS Impairment Test 200

GAAP Goodwill Impairment Test 202

Chapter 15: The Auditor’s Blessing 207

Auditing Fair Values 208

Conclusion 220

About the Author 221

Index 223

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James P. Catty has been engaged in business valuations around the world for more than fifty years and has undertaken speaking engagements in China, Germany, Romania, Taiwan, Turkey, the U.K., and the U.S. He is Chairman of the International Association of Consultants, Valuators and Analysts (IACVA); President of Corporate Valuation Services Limited (CVS), Toronto; and of counsel to Hanlin Moss, PS in Seattle, Washington, and Xi'an, China. Catty is the author of the Wiley Guide to Fair Value under IFRS.

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