Valuation for Financial Reporting and Planning
Allocations of Purchase Price – Under Accounting Standards Codification (ASC) No. 805 Business Combinations and FAS No. 164 Not-For-Profit Mergers and Acquisitions, companies are required to use purchase accounting for business combinations. When one company acquires another, the acquirer must allocate the purchase cost for financial reporting purposes. Typically, portions of the cost are assigned at Fair Value to plant, property, and equipment; intangible assets; inventory; other working capital; and goodwill.
Fair Value Measurement – Fair Value continues to be an important measurement basis in financial reporting for healthcare entities, as it provides information about what an entity might realize if it sold or transfer an asset or might pay to transfer a liability. ASC Topic 820 establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.
Impairment Testing – Under ASC No. 350, Goodwill and Other Intangible Assets, companies are required to perform an impairment test of Goodwill and other indefinite lived intangible assets as well as identifiable intangibles. If the Fair Value of a business unit is less than the carrying amount of the assets in that business unit, then impairment exists.
Impairment or Disposal of Long-Lived Assets - Under ASC No. 360, companies are required to evaluate long-lived assets and test long-lived assets for recoverability and impairment. Impairment is determined by comparing undiscounted cash flows.
Valuation of Derivatives – Derivatives continue to be widely used to provide financial flexibility by investors. The FASB issued SFAS No. 133 in 2000 due to concerns arising from the complications in accounting for derivatives. SFAS No. 133 currently falls under ASC No. 815, accounting for Derivative Financial Instruments & Hedging Activities. As such, derivatives and hedging activities must be measured at Fair Value and recognized as assets or liabilities in the financial statements. Valuations require a complicit understanding of the underlying instrument or security as well as the contractual rights and obligation terms in the derivative contract.
Share Based Payment – ASC 718 Stock Compensation requires all entities (with limited exceptions) to recognize the fair value of share-based payment awards. Companies must determine whether their awards should be classified as liabilities or equity. Company awards of stock options must be assigned a Fair Value as of the Grant Date. Considerations should include the selection of an appropriate valuation model, as well as suitable input assumptions such as expected term determined by exercise behavior, vesting, and expected volatility.
Cheap Stock Valuation – Cheap stock refers to issuance of an equity security (e.g. common stock, options, or warrants) during the period of 12 months prior to an initial public offering (IPO) for a price (or exercise price) that is below the expected IPO price. In order to address this issue, it is important that contemporaneous valuation analyses be performed in accordance with the AICPA Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” and the allocation methods described therein.