ASC 820 defines fair value, establishes a framework for measuring it, and expands disclosures about fair value measurements. According to ASC 820-10-20:
“Fair value is 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 definition of fair value retains the exchange price notion in earlier definitions of fair value. ASC 820 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Adams Capital works with big 4 to sole practitioner accounting firms and delivers valuation results supported by a detailed written report and work papers specifically addressing ASC 805 requirements. These deliverables can be easily adopted by auditors. Our staff includes former big 4 professionals with audit experience who speak the same language. We are therefore able to answer the questions quickly and efficiently.
The premise of value used in ASC 805 measurements is fair value, which is defined in ASC 820 and focuses on market participants and exit values. Appropriate implementation requires both valuation and market knowledge. Accounting for business combinations is complex, and best addressed by an independent, third party valuation firm that routinely assists clients with these matters.
Adams Capital determines the fair value of the consideration, all assets acquired, and liabilities assumed. The analysis includes the valuation of contingent consideration, such as earnouts, and intangible assets.
If a fixed asset appraisal is required to meet the fair value standard, Adams Capital’s extensive experience with fixed asset appraisal will be integrated into the overall purchase price allocation. We provide a single point of contact and coordinated data requests to simplify project ramp up. We also use consistent assumptions and coordinated results for these complex multidisciplinary projects. Our work plan is designed to reduce management work effort through careful planning and execution by knowledgeable appraisal professionals.
Determining the fair value of any asset requires the appraiser to perform various advanced valuation methodologies while complying with FASB Statements. Proper compliance with ASC 805 and ASC 820 is critical to producing a valuation report that supports the audit process in a quick and efficient manner.
ASC 805 requires contingent consideration to be measured and added to total consideration. Depending on the circumstances, Adams Capital may use advanced measurement methods, such as Monte Carlo simulation and option analysis to determine contingent consideration fair value.
If the fair value of net assets acquired is less than the total consideration paid for the acquired entity, the difference is recorded as goodwill. If the fair value of net assets acquired exceeds the consideration paid, the entity recognizes a gain on bargain purchase. Both scenarios must be properly explained as to why they make sense in that specific transaction.
Private companies do not have a marketplace to set value as publicly-traded companies do. For private companies, stock compensation raises a valuation issue. First, the company’s value must be determined by performing detailed financial analysis of the company and of comparable publicly traded companies. Second, the value attributable to the option must be determined.
Option pricing models estimate what an option would sell for in the market today (i.e., its fair market value) given the terms of the option and the underlying stock characteristics, including future expectations. Traditionally, the Black-Scholes model is the preferred method for determining the value of an option for financial reporting and taxation purposes. The main assumption underlying the Black-Scholes model is that the underlying stock behaves in such a way that future price changes can be modeled by a probability distribution. These modeled future values, along with other variables, are then used to determine the option’s estimated fair market value. These variables include the:
Underlying stock’s value
Exercise price of the option
Underlying stock price volatility
Dividend expected
Risk-free interest rate for the option term remaining
Time until expiration (or the expected life) of the options
For companies with complex capital structures, including multiple rounds of preferred stock, warrants for preferred stock, and common stock options, the determination of the common stock value is a complicated task. Adams Capital considers and applies the Current Value Method, the Option-Pricing Allocation Method, and the Probability Weighted Expected Return Method where appropriate.
Stock option valuations are complex problems requiring critical expert decisions. Every situation is unique, so every valuation should be treated with a fresh perspective using the latest market data. Adams Capital has the experience and credentials to make defensible assertions on the value of any type of stock option or bonus share.
The goodwill impairment test has been simplified compared to previous requirements. The new goodwill impairment test is a single step quantitative test. The standard of value is fair value. Fair value must comply with the definition and standards prescribed by ASC 820.
Goodwill and other intangible assets may be tested between annual test dates if there is:
A significant adverse change in legal factors or in the business climate
An adverse action or assessment by a regulator
Unanticipated competition
A loss of key personnel
A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of
The testing for recoverability under Statement 121 of a significant asset group within a reporting unit
Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
Goodwill and indefinite lived intangible assets must be tested at the reporting unit level. The identification of a company’s reporting units can be a critical part of the ASC 350 analysis, and we work with our clients and their auditors to appropriately recognize the reporting units.