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Fair Value Checklist with Latest Updates on FASB Rules

With audit season upon us, it is likely time to start thinking about (if you haven’t already) valuation issues that will impact your audit prior to fieldwork getting started. With an eye towards simplification and streamlining, FASB has issued several pronouncements over the past few years dealing with Fair Value accounting and valuation. The most common Fair Value questions and updates to be aware of include:

  1. Did you make acquisitions in 2016?

If so, a purchase price allocation in accordance with ASC 805 is probably required, in which the fair value of all acquired assets and liabilities, including previously un-booked intangible assets such as technology (whether patented or not), trade names, customer relationships (whether contractual or not) and various others must be valued and recorded.

Latest Update: FASB issued Accounting Standards Update 2014-18 in which private companies that choose to adopt this alternative will no longer have to determine the fair value and recognize certain customer-related intangible assets or those attributable to noncompetition agreements acquired in business combinations. Instead, these amounts will be included as a part of goodwill. The primary objective of this alternative was to save time and cost associated with the purchase price allocation.

2. Do you have goodwill on your balance sheet?

If so, this goodwill must be tested annually for impairment. While new FASB rules allow companies to initially measure impairment using qualitative factors, inevitably many prudent auditors will require more rigorous quantitative procedures.

Latest Update: Beginning in 2015, ASC 350 now permits an accounting alternative that will allow private companies that adhere to GAAP to amortize goodwill on a straight-line basis over 10 years, or less if it can be demonstrated that another useful life is more appropriate. Companies that elect the alternative will no longer have to do annual goodwill impairment tests. Instead, they would only perform an impairment test in the case of a triggering event. In cases where impairment is identified, it will be recorded simply as the amount by which the book value of an entity (or reporting unit) exceeds the fair value (until the goodwill of the company is gone). 

While there is nothing definitive yet, in May 2016, FASB proposed completely eliminating Step 2 of the current goodwill impairment test for companies not electing the accounting alternative. Under the proposal, goodwill impairment loss would instead be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. 

3. Did you issue any stock-based compensation in 2016, such as stock, options, stock appreciation rights, warrants, etc.?

If so, the fair value of this stock-based compensation must be determined so that an appropriate compensation expense can be recorded. Also, in the case of options and warrants, there may be income tax-related issues to address related to IRC 409(A).

Now is definitely the time to contact a valuation advisor if any of these issues apply to you, as most high quality valuation advisors are currently filling up their backlogs and workloads for the upcoming audit season.

Article written by:
Craig Hickey, CFA
Senior Manager, Valuation Services

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