Article written by:
Brian Bornino, CPA/ ABV, CFA, CBA
Director of Valuation Services
Once again it’s audit season, and once again fair value measurements have been cited as a top area of deficiencies in audits. The Public Company Accounting Standards Oversight Board (the “PCAOB”), a Congressionally-established organization that assesses the quality of audits of publicly-traded companies, recently released a Staff Inspection Brief that identified the three most common areas of audit deficiencies in 2016, and this report confirms that fair value measurements continue to be a major problem area for audits.
Whether your company receives an audit or a review, the requirements to follow Generally Accepted Accounting Principles (“GAAP”) are the same, and more and more companies are becoming affected by fair value measurements. How can you be sure that your company will not run afoul of any fair value measurement requirements related to your financial statements? The most common issues to be aware of include:
1. Did you make acquisitions in 2017?
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. Note that there is a private company alternative that may simplify some of this requirement, although compliance with ASC 805 is still required.
2. Did you issue any stock-based compensation in 2017, such as stock, incentive stock options, stock appreciation rights, phantom stock, warrants, etc.?
If so, the fair value of this stock-based compensation must be determined in accordance with ASC 718, Share-Based Payments, so that an appropriate compensation expense can be recorded. Also, there may be income tax-related implications with this activity related to IRC 409(A).
3. Do you have goodwill on your balance sheet?
If so, this goodwill must be tested annually for impairment, unless you have elected a private company alternative that allows goodwill to be amortized over a 10-year period. Many companies with liquidity events on their horizons are sometimes advised to forego this private company alternative, as potential acquirers may include publicly-traded companies, private equity investors, or other companies that follow “Big GAAP”.
The PCAOB confirmed that many companies struggle with fair value measurements. A complicating factor is that independence rules prohibit a company’s CPA firm from performing these fair value assessments if they are issuing an audit or review opinion, so the work of a valuation specialist is often required. The good news is that fair value measurements do not have to be an area of frustration. GBQ has assisted hundreds of companies and their auditors with fair value measurements, and we would welcome the opportunity to speak with you about any of the items above.