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Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

ISBN: 978-1-118-22907-1
592 pages
November 2012
Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition (111822907X) cover image

FAIR VALUE MEASUREMENT

Practical Guidance and Implementation

"Writing Fair Value Measurement 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 measurement, this is it!"

—Neil J. Beaton, CPA/ABV, CFA, ASA, Managing Director, Valuation Services, Alvarez & Marsal

"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 fair value measurement and how investors and creditors should interpret it. 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 University

"The focus of the book is on fair value measurement based on level 3 inputs. This is a critical area of valuations for financial reporting due to a false comfort given by routine application of evaluating models and assumptions without real possibilities of calibration. Mark Zyla offers an extraordinary help in understanding the reliability of the inputs and the outputs of the different methodologies and the inherent biases in each of them. The book is a precious support for better valuation both in U.S. GAAP and in IFRS fair value reporting."

—Mauro Bini, Full Professor of Corporate Finance, Bocconi University; Chairman, Management Board OIV (Organismo Italiano di Valutazione) Essential guidance on the fair value measurement process

Now in a second edition, Fair Value Measurement: Practical Guidance and Implementation helps you succeed in understanding the fair value accounting rules that entities must follow. The result is a resource that you can rely on to understand the importance of valuation and the concepts that define it. In basic, nontechnical language, author Mark Zyla presents practical direction for best practices of financial valuation as well as for understanding the many FASB pronouncements involving fair value. An essential guide for auditors and valuation specialists, Fair Value Measurement: Practical Guidance and Implementation, Second Edition brings you up to speed on what fair value really means.

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Preface xiii

Acknowledgments xix

Chapter 1: The History and Evolution of Fair Value Accounting 1

Why the Trend toward Fair Value Accounting? 2

History and Evolution of Fair Value 7

Fair Value Accounting and the Economic Crisis 15

The FASB and IASB Convergence Project 22

The Future of Fair Value Measurement 29

Conclusion 30

Notes 31

Chapter 2: Fair Value Measurement Standards and Concepts 37

FASB ASC 820, Fair Value Measurement 38

Disclosures 65

Fair Value Option 69

Conclusion 78

Notes 78

Chapter 3: Business Combinations 79

Mergers and Acquisitions 80

Accounting Standards for Business Combinations—A Brief History 83

ASC 805, Business Combinations 86

Other Business Combination Highlights 93

Subsequent Accounting for Goodwill and Other Intangible Assets 97

Conclusion 98

Notes 99

Chapter 4: The Nature of Goodwill and Intangible Assets 103

History of Intangible Assets 104

Intellectual Property 106

Economic Basis of Intangible Assets 106

Identification of Intangible Assets 108

Useful Life of an Intangible Asset 113

Intangible Assets and Economic Risk 114

Goodwill 115

Economic Balance Sheet 118

Conclusion 120

Notes 121

Chapter 5: Impairment 123

Evolution of Impairment Testing 125

Applicable FASB Guidance for Impairment Testing 127

Accounting for the Impairment of Long ]Lived Assets 128

Goodwill Impairment Testing 131

Testing Other Indefinite ]Lived Intangible Assets for Impairment 147

Conclusion 148

Notes 149

Appendix 5A: Example of a Qualitative Impairment Analysis—PlanTrust, Inc. 151

Financial Accounting Standards Board ASC 350, Intangibles—Goodwill and Other 151

PlanTrust, Inc. 152

Notes 170

Chapter 6: The Cost Approach 171

The Cost Approach under FASB ASC 820, Fair Value Measurement 172

Economic Foundation for the Cost Approach 175

Cost versus Price versus Fair Value 175

The Role of Expected Economic Benefits in the Cost Approach 178

Reproduction Cost versus Replacement Cost 178

Components of Cost 180

Obsolescence 182

The Relationships among Cost, Obsolescence, and Value 182

Physical Deterioration 184

Functional (Technological) Obsolescence 185

Economic (External) Obsolescence 186

Applying the Cost Approach 188

Taxes under the Cost Approach 192

Limitations of the Cost Approach 194

Conclusion 195

Notes 195

Chapter 7: The Market Approach 199

Measuring the Fair Value of an Entity Using a Market Approach 201

Conclusion 232

Notes 232

Appendix 7A: Using the Guideline Transaction Method to Measure the Fair Value of a Privately Held (or Thinly Traded) Debt Security 235

Chapter 8: The Income Approach 253

Discounted Cash Flow Method 254

Multiperiod Excess Earnings Method 262

FASB Concepts Statement 7 280

Rates of Return under the Income Approach 286

The Income Increment/Cost Decrement Method 287

Profit Split Method 288

Build ]Out Method, or “Greenfield Method” (With and Without) 294

Weighted Average Cost of Capital Calculation 294

Conclusion 303

Notes 303

Chapter 9: Advanced Valuation Methods for Measuring the Fair Value of Intangible Assets 307

Limitations of Traditional Valuation Methods 308

Real Options 309

Using Option ]Pricing Methodologies to Value Intangible Assets 313

Black ]Scholes Option Pricing Model 317

Binomial or Lattice Models 320

Monte Carlo Simulation 327

Decision Tree Analysis 328

Conclusion 331

Notes 331

Chapter 10: The Remaining Useful Life of Intangible Assets 333

FASB Guidance on Determining the Remaining Useful Life 333

Considerations in Measuring Useful Lives of Intangible Assets 336

Guideline Useful Lives 341

Conclusion 342

Notes 342

Chapter 11: Fair Value Measurement for Alternative Investments 345

Investments in Certain Entities That Calculated Net Asset Value per Share 347

AICPA Technical Practice Aid 349

AICPA Guidance for Determining the Fair Value of Investment 351

U.S. Private Equity Valuation Guidelines 356

Fair Value Measurement for Alternative Investment Funds 357

Conclusion 359

Notes 360

Chapter 12: Contingent Consideration 361

Contingent Consideration: Earn ]Outs in Business Combinations 362

Accounting for Contingent Consideration 363

Conclusion 376

Notes 377

Appendix 12A: Measuring the Fair Value of a Loan Guarantee 379

The Jordan Lee Fund Guarantee of Townsend Farm Development, LLC 381

Notes 387

Chapter 13: Auditing Fair Value Measurement 389

Auditing Standards 390

Audit Standards for Fair Value Measurements and Disclosures 392

The Audit Process 394

Auditing Estimates in Fair Value Measurements 399

AU 328, Auditing Fair Value Measurements and Disclosures 400

PCAOB Staff Audit Practice Alert No. 2 409

PCAOB Staff Audit Practice Alert No. 9 413

SEC Audit Guidance 415

AICPA Non ]Authoritative Guidance 416

The Appraisal Foundation 416

Conclusion 417

Notes 418

Appendix 13A: Auditing a Business Combination or a Step 2 Impairment Test 421

General 421

Income Approach 423

Cost Approach 426

Market Approach 427

Appendix 13B: Auditing a Step 1 Goodwill Impairment Test 429

General 429

Income Approach 430

Market Approach 432

Appendix 13C: Survey of Fair Value Audit Deficiencies 435

Audit Deficiencies Increase in Difficult Economic Times 436

PCAOB Inspections 436

Methodology 437

Description of a Deficiency 438

Audit Deficiency Trends 438

FVM Deficiencies 440

Impairment Deficiencies 442

Conclusion 443

Notes 445

Chapter 14: Fair Value Measurement Case Study 447

Learning Objectives 447

Business Background and Facts—Mobile Apps Source, Inc. 448

Note 484

Appendix 14A: Suggested Case Study Solutions 485

Information Request—ASC 350 517

Information Request for Business Combination—ASC 805 519

Glossary of International Business Valuation Terms 523

Bibliography 533

About The Author 547

Index 549

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MARK L. ZYLA, CPA/ABV, CFA, ASA, is a leader in the area of fair value measurement. He is Managing Director of Acuitas, Inc., an Atlanta, Georgia–based valuation and litigation consultancy firm, providing valuation consulting for various 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. He has served as Chairman of the AICPA's Fair Value Measurement Conference and serves on the AICPA's Impairment Issues Task Force. He is also the author of the AICPA courses "Fair Value Accounting: A Critical New Skill for CPAs" and "Valuing Goodwill and Other Intangible Assets." He was vice chairman of the Appraisal Foundation's first Best Practices in Valuation for Financial Reporting Working Group. He serves on the faculty of the National Judicial College. Mark lives in Atlanta with his wife, JoAnn, and son, Jack.

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