Fair Value Reporting


ASC 820 (Formerly SFAS 157) Fair Value

The Accounting Standards Codification 820 is the clear definition of fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The standard establishes three valuation methodologies to use in the estimation of fair value:

  • Market approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

  • Income approach – uses valuation techniques to convert future benefits and costs (usually potential cash flows or earnings) into a single present value amount.

  • Cost approach – based on the amount that currently would be required to replace the service capacity of an asset.

Accounting Standards Codification 820 is the centerpiece of all of our valuations – ASC 350, ASC 360, ASC 718, ASC 805.

ASC 350 (Formerly SFAS 142) Goodwill Impairment Testing

Accounting Standards Codification 350, better known as 'goodwill impairment testing', outlines a two step process for determining the impairment of goodwill. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value is in excess of carrying value, the goodwill of the reporting unit is not impaired, thus the second step of the impairment test is unnecessary. If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss.

ASC 360 (Formerly SFAS 144) Impairment or Disposal of Long-Lived Assets

Accounting Standards Codification 360 is used to test the impairment of long lived assets whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. An initial test is performed to determine whether the undiscounted cash flows are greater than the carrying value of the long lived asset. Should the carrying value be greater than the undiscounted cash flows, the recognition of impairment may be required. The impairment loss is determined as the spread between the discounted cash flows and the carrying value of the long lived asset. ASC 360 is not applicable to goodwill, intangible assets which are not being amortized, long-term customer relationships of financial institutions, and certain other assets.

ASC 718 (Formerly SFAS 123R) Stock Compensation

Accounting Standards Codification 718 (formerly SFAS 123R) provides guidance for reporting share based payments to acquire assets, settle liabilities, and compensate employees. ASC 718 requires that all equity awards granted to employees, consultants, and board members be accounted for at "fair value" and then expensed over the vesting term of the grant. This can become more difficult as additional grants are made and vesting and forfeitures add complexity to the calculations. We provide calculations of the fair value of common stock and common stock options, commonly known as 409a. The valuation process for ASC 718 is similar to that used in 409A analysis.

ASC 805 (Formerly SFAS 141R) Business Combinations

Business combinations and asset purchases give rise to a number of financial reporting requirements for the stakeholders involved. Companies with GAAP based financial statements must comply with the guidance set forth in Accounting Standards Codification 805 (formerly SFAS 141R) recognizing and allocating all balance sheet items in an acquisition.

Accounting Standards Codification 805 (referred to as 'purchase price allocation') provides guidance to allocate the premium paid above net book value in a merger or acquisition to both the tangible and identifiable intangible assets acquired in the transaction. Specifically, the fair values of acquired tangible assets or identifiable intangible assets are estimated and reported on the balance sheet. Any remaining amount is then reported as goodwill and tested for impairment annually in accordance with ASC 350.

Our experts use valuation methodologies in accordance with AICPA, GAAP, and USPAP standards to develop analytical solutions to support accurate valuations for tangible and intangible assets.

Internal Revenue Code §409A

409A governs all privately held companies seeking to issue any form of deferred compensation, which includes many types of equity-based compensation such as stock options. The IRS requires that private companies establish that their stock options are not being issued "in-the-money" or with an exercise price below "fair market value."