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Step Zero: New Qualitative Assessment Allowed for Assessing Goodwill


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Shannon Farr presented this PowerPoint at the 2012 Decosimo Accounting Seminar.

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Step Zero: New Qualitative Assessment Allowed for Assessing Goodwill

  1. 1. A Global Reach with a Local Perspective 2012 DECOSIMO ACCOUNTING SEMINAR www.decosimo.comStep Zero: New Qualitative Assessment Allowed for Assessing GoodwillSHANNON FARR, CPA, ABV, CFFValuation Manager, Decosimo Advisory Services
  2. 2. Who? Where? Why? What? When?Who? The Financial Accounting Standards Board (FASB)What? Accounting Standards Update No. 2011-08, Testing Goodwill for ImpairmentWhen? Issued September 2011, effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011Where? All entities, both public and nonpublic, that have goodwill reported in their financial statementsWhy? To address concerns “about the cost and complexity of performing the first step of the two-step goodwill impairment test required under ASC Topic 350”
  3. 3. An entity now has the option to firstassess qualitative factors todetermine whether the “existence ofevents or circumstances leads to adetermination that it is more likelythan not that the fair value of areporting unit is less than its carryingamount.”
  4. 4. The Step-Zero Impairment Assessment Qualitative factors for management to consider prior to the performance of the two-step impairment test include the following:  Macroeconomic conditions  Industry conditions  Cost factors  Overall financial performance  Entity-specific events
  5. 5. The Step-Zero Impairment Assessment – cont’d If qualitative assessment indicates that “it is more likely than not” that the fair value of a reporting unit is less than its carrying amount, the entity is required to proceed to Step 1 of the goodwill impairment test (“More likely than not” is defined as “a likelihood of more than 50 percent”)
  6. 6. Macroeconomic Conditions A deterioration in general economic conditions Limitations on accessing capital Fluctuations in foreign exchange rates Other developments in equity and credit markets
  7. 7. General Economic Conditions?
  8. 8. National Economic ConditionsAccording to Decosimo’s National Economic Conditions: In November 2011, the FOMC predicted that real GDP growth would have a central tendency between 1.6% and 1.7%, between 2.5% and 2.9%, and between 3.0% and 3.5% during 2011, 2012, and 2013, respectively. In its longer run projection, the FOMC predicted that real GDP growth would have a central tendency between 2.4% and 2.7% (consistent with its previous longer-run projection). The third quarter Philadelphia Federal Reserve Survey of Professional Forecasters (the “Philly Survey”) predicts real GDP growth of 1.6%, 1.8%, 1.9%, and 2.1% (SAAR) for the fourth quarter of 2011 and the first, second and third quarters of 2012, respectively. The Philly Survey further predicts annual GDP growth of 2.0%, 2.1% during 2011 and 2012, respectively. The September Wall Street Journal Survey of Economic Forecasters (the “WSJ Survey”) predicts growth rates of 2.1%, 2.1%, 2.4%, and 2.6% (SAAR), for the fourth quarter of 2011 and the first, second, and third quarters of 2012, respectively. The WSJ Survey projects GDP will experience annual growth rates of 1.5% and 2.4% in 2011 and 2012, respectively.
  9. 9. Other Economic Resources TENNESSEE BUSINESS AND ECONOMIC OUTLOOK, Center for Business and Economic Research, College of Business Administration, The University of Tennessee, Knoxville, Tennessee Federal Reserve (various information available at U.S. Department of Commerce, Bureau of Economic Analysis U.S. Census Bureau Local Chamber of Commerce websites
  10. 10. Industry Conditions a deterioration in the market in which an entity operates increased competition a decline in market-dependent multiples or metrics (absolute or relative) change in the market for the entity’s products or services a regulatory or political development
  11. 11. Market Deterioration?
  12. 12. IBISWorld Revenue Growth PredictionsIndustry Growth 06/07- Growth 11/12- 11/12 16/17Chemical product manufacturing -1.9% 1.7%Inorganic chemical manufacturing 2.2% 2.3%Primary care physicians 2.2% 4.2%Specialist physicians 2.8% 5.5%Diagnostic and medical laboratories 2.0% 4.5%Aluminum manufacturing -5.1% 4.7%Wiring device manufacturing -3.2% 3.3%Printing -5.5% -1.8%Fast food restaurants -1.6% 2.0%Natural gas distribution -2.1% 5.8%
  13. 13. Regulatory or Political Developments
  14. 14. Cost Factors increases in raw materials cost increased labor cost other significant cost increases
  15. 15. Production Cost Expectations?
  16. 16. Production Cost Trends Average Annual Price of Crude Oil % Growth Historical IBISWorld $140 60% $120 45% Price pe r Barre l $100 30% Grow th $80 15% $60 0% $40 -15% $20 -30% $0 -45% 2015* 2016* 2017* 2012* 2013* 2014* 2000 2001 2006 2007 2008 2009 2010 2002 2003 2004 2005 2011 Ye ar
  17. 17. Overall Financial Performance negative or declining cash flows a decline in actual or planned revenue or earnings compared with actual and projected results of prior periods
  18. 18. What’s Happening with EBITDA?
  19. 19. Entity-Specific Events changes in management or key personnel changes in strategy or customers contemplation of bankruptcy litigation issues, etc.
  20. 20. Realistic Assessment of the Effects of a Change in Strategy?
  21. 21. Other Relevant Events and Circumstances toConsider A change in the composition or carrying amount of a RU’s net assets An expectation of selling or disposing all, or a portion of a reporting unit If applicable, a sustained decrease in share price (absolute or relative)
  22. 22. Reaching a ConclusionThe desired result of the qualitative assessment is to reach a conclusion as to whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.To what extent could each of the adverse events or circumstances identified affect the reporting unit’s fair value or the carrying value of its net assets?
  23. 23. The End ResultIf after assessing the totality of events and circumstances described, an entity decides “it is not more likely than not” that the fair value of a RU is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary
  24. 24. Take Aways Qualitative assessment ≠ no assessment  Document, document, document Many free resources are available to aid in the assessment Decosimo advisors can help you research industry trends, transaction multiples and guideline public company multiples If a goodwill impairment test is necessary, Decosimo provides that service (for our audit clients, we will be glad to refer you to an independent firm)
  25. 25. Shannon FarrCPA, ABV, CFFValuation Manager | shannonfarr@decosimo.comShannon Farr is a valuation manager with more than 15 yearsof accounting experience. Her practice has focused onbusiness valuation and litigation since 2004. She is accreditedin business valuation (ABV) and also certified in financialforensics (CFF). Shannon performs fair value for financialreporting valuations to be used in purchase price allocationsand goodwill impairment testing. Her litigation supportexperience has been used in numerous marital dissolutioncases as well as contract and shareholder disputes. Shannonprovides expert witness testimony, as well as serving the courtas Special Master.