Fair Value Measurement

MARK L. ZYLA is a Managing Director of Zyla Valuation Advisors, LLC. an Atlanta, Georgia based valuation and litigation consultancy firm. He is a Certified Public Accountant, Accredited in Business Valuation (CPA/ABV), Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants (AICPA), a Chartered Financial Analyst (CFA), and an Accredited Senior Appraiser with the American Society of Appraisers certified in Business Valuation (ASA). Mark is the Chairman of the Standards Review Board of the International Valuation Standards Council (IVSC) and has served on the AICPA's Forensic and Valuation Services Executive Committee. Mark was inducted into the AICPA Business Valuation Hall of Fame in 2013.

• Preface xiiiAcknowledgments xixChapter 1: The History and Evolution of Fair Value Accounting 1Why the Trend Toward Fair Value Accounting? 2History and Evolution of Fair Value 5Fair Value Accounting and the Economic Crisis 12The FASB and IASB Convergence Project 17The Future of Fair Value Measurement 23Fair Value Quality Initiative for Valuation Specialists 24Conclusion 26Notes 26Appendix 1A: The Mandatory Performance Framework 31Performance Requirements 31Conclusion 33Notes 46Chapter 2: Fair Value Measurement Standards and Concepts 47FASB ASC 820, Fair Value Measurement 48Disclosures 67Fair Value Option 70Standards in the Valuation Profession and Fair Value Measurements 77Conclusion 79Notes 80Appendix 2A: Taxes and Fair Value Measurements 81Summary of Changes under 2017 TCJA 81Chapter 3: Business Combinations 85Mergers and Acquisitions 86Accounting Standards for Business Combinations—A Brief History 88ASC 805, Business Combinations 90Other Business Combination Highlights 95Subsequent Accounting for Goodwill and Other Intangible Assets 99Conclusion 100Notes 101Chapter 4: The Nature of Goodwill and Intangible Assets 103History of Intangible Assets 104Intellectual Property 105Economic Basis of Intangible Assets 106Identification of Intangible Assets 106Useful Life of an Intangible Asset 111Intangible Assets and Economic Risk 112Goodwill 112Economic Balance Sheet 114Conclusion 116Notes 117Chapter 5: Impairment 119Evolution of Impairment Testing 120Applicable FASB Guidance for Impairment Testing 122Accounting for the Impairment of Long-Lived Assets 123Goodwill Impairment Testing—Public Companies 125Goodwill Impairment—One-Step Impairment Loss 138Testing Other Indefinite-Lived Intangible Assets for Impairment 139Amortization of Goodwill 139Conclusion 140Notes 140Appendix 5A: Example of a Qualitative Impairment Analysis—PlanTrust, Inc. 143Financial Accounting Standards Board ASC 350, Intangibles—Goodwill and Other 143PlanTrust, Inc. 144Notes 159Chapter 6: The Cost Approach 161The Cost Approach under FASB ASC 820, Fair Value Measurement 162Economic Foundation for the Cost Approach 164Cost versus Price versus Fair Value 164The Role of Expected Economic Benefits in the Cost Approach 166Reproduction Cost versus Replacement Cost 167Components of Cost 168Obsolescence 169The Relationships Among Cost, Obsolescence, and Value 170Physical Deterioration 171Functional (Technological) Obsolescence 172Economic (External) Obsolescence 173Applying the Cost Approach 174Taxes Under the Cost Approach 178Limitations of the Cost Approach 179Conclusion 179Notes 180Chapter 7: The Market Approach 183Applying the Market Approach When Measuring the Fair Value of an Entity or a Reporting Unit of an Entity 184Conclusion 213Notes 213Chapter 8: The Income Approach 215Introduction 215Discounted Cash Flow Method 216Multiperiod Excess Earnings Method 223FASB Concepts Statement 7 239Rates of Return Under the Income Approach 244The Income Increment/Cost Decrement Method 245Profit Split Method 246Build-Out, or Greenfield, Method 251Weighted Average Cost of Capital Calculation 251Conclusion 258Notes 259Chapter 9: Advanced Valuation Methods for Measuring the Fair Value of Intangible Assets 261Introduction 261Limitations of Traditional Valuation Methods 261Real Options 263Using Option Pricing Methodologies to Value Intangible Assets 266Black-Scholes Option Pricing Model 269Binomial or Lattice Models 272Monte Carlo Simulation 277Decision Tree Analysis 280Conclusion 281Notes 281Chapter 10: Measuring the Remaining Useful Life of Intangible Assets in Financial Reporting 283FASB Guidance on Determining the Remaining Useful Life 283Considerations in Measuring Useful Lives of Intangible Assets 285Practical Guidance for Estimating and Modeling the Useful Life 289Conclusion 295Notes 295Chapter 11: Fair Value Measurement for Alternative Investments 297Introduction 297Investments in Certain Entities That Calculated Net Asset Value per Share 299AICPA Technical Practice Aid 300AICPA Guidance for Determining the Fair Value of Investment 301AICPA Accounting and Valuation Guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies 305International Private Equity and Venture Capital Valuation Guidelines 306Common Valuation Methodologies of Measuring the Fair Value of the Fund’s Investment Portfolio 307Conclusion 308Notes 308Chapter 12: Contingent Consideration 311Contingent Consideration: Earn-outs in Business Combinations 311Accounting for Contingent Consideration 312Conclusion 324Notes 324Appendix 12A: Measuring the Fair Value of a Nonfinancial Contingent Liability—Example of a Loan Guarantee 327The Jordan Lee Fund Guarantee of Townsend Farm Development, LLC 328Notes 334Chapter 13: Auditing Fair Value Measurement 335Auditing Standards 336The Audit Process 338Evolution of Audit Standards for Fair Value Measurements and Disclosures 342Auditing Standard 2501, Auditing Accounting Estimates, Including Fair Value Measurements 344Auditing Standards for Auditor’s Use of the Work of Specialists 349Proposed International Standard on Quality Management 1 354Practical Guidance for Auditors 354PCAOB Staff Audit Practice Alert No. 9, Assessing and Responding to Risk in the Current Economic Environment 356AICPA Nonauthoritative Guidance 358The Appraisal Foundation 359Conclusion 359Notes 360Appendix 13A: Auditing Fair Value Measurement in a Business Combination 363Auditor Questions 363General 363Income Approach 364Cost Approach 366Market Approach—General 367Appendix 13B: Auditing Fair Value Measurement in a Goodwill Impairment Test 369General 369Income Approach 370WACC 371The Market Approach 372Chapter 14: Fair Value Measurement Case Study 373Learning Objectives 373Business Background and Facts—Dynamic Analytic Systems, Inc. 374Notes 406Appendix 14A: Suggested Case Study Solutions 407Note 437Appendix 14B: Model Fair Value Measurements Curriculum 439Acknowledgments 439AICPA Staff 440About Us 440Preface 440Model Fair Value Measurement Curriculum 440Appendices and Examples 448Note 451Glossary of International Business Valuation Terms 453Bibliography 463About the Author 475Index 477