FINANCIAL REPORTING SERVICES – Enhancing the credibility of your financial reporting.
Quist provides analytical insights and the resources our clients need to meet tax and financial reporting responsibilities. Our experience and breadth of resources has enabled us to become a leader in valuing intangible and tangible assets. We are committed to thoroughly understanding the changes in regulation and industry best practices. Quist offers the following financial reporting services:
Purpose: To provide directors and management with objective valuation information on which they can rely when making stock-related decisions.
There are many instances when a strategic valuation may be required, including:
- Strategic Planning
- Acquisitions or Divestitures
- Corporate Recapitalizations
- Vertical Integration
- Capital Formation
- Buy/Sell agreements
- Management Buyouts
The value of a company to a strategic buyer may be based on more than book value, historical operating results, or an appraisal of fixed assets. Whereas financial buyers are primarily concerned with the return on investment that can be generated on a stand-alone basis, strategic buyers assess the returns that are expected from a business combination, including any potential synergies. In general, the magnitude of the premium above the value of the company to a financial buyer represents the negotiating range between the strategic buyer and seller.
Portfolio Company Valuations
Purpose: To establish the fair value of business investments held by venture capital companies and private equity firms.
According to Accounting Standards Codification (ASC) 820, portfolio companies held by venture capital and private equity firms must be reported at fair value on the investing firms’ financial statements. While management may be capable of estimating the fair value of portfolio companies, Quist can make the process more accurate, more efficient and more supportable.
Purpose: To determine the excess of a taxpayer’s liabilities over the fair market value of the taxpayer’s assets before the discharge of indebtedness.
Code Section 108(d)(3) defines insolvency as the excess of a taxpayer’s liabilities over the fair market value of the taxpayer’s assets immediately before the discharge of indebtedness. The level of insolvency determines the maximum amount of indebtedness forgiven by a creditor that a taxpayer can exclude from gross income for tax purposes. The determination of insolvency is a valuation matter and requires the fair market value appraisal of all of the taxpayer’s assets, including tangible and intangible assets, immediately before the discharge of indebtedness.
Mergers & Acquisitions
Purpose: To provide directors and management with independent and objective valuation information as they plan for or execute acquisition and divestiture decisions.
Business owners make thousands of decisions affecting the day-to-day activities of their companies. However, they may be unfamiliar with many important decisions surrounding the sale or acquisition of businesses. Targeting prospective buyers and sellers, determining the proper process, and timing the initiative are all essential. Yet, nothing is more critical than understanding the valuation issues.
Management cannot properly negotiate and close a transaction without a good understanding of the valuation considerations. This includes: surveying the market, including a competitive analysis; analyzing the company and its financial performance; reviewing transactions involving similar businesses; understanding the cost of capital in the industry; evaluating the value drivers; and assessing synergistic benefits when applicable.
Purpose: To provide directors and management with independent valuation information on intangible assets as a basis for making transactional decisions.
Intangible assets are long-lived assets used in the production of goods and services that, unlike fixed or tangible assets, lack physical properties. Intangible assets represent certain legal rights or competitive advantages developed or acquired by a business enterprise. Examples include: non-compete agreements, customer lists, employment contracts, and lease agreements.
A sub-classification of intangible assets is intellectual properties, which are intangible assets created by intellectual or inspirational processes. Examples include: trademarks, patents, copyrights, technical know-how, and data processing/technology.
Appraisals of intangible assets are required for many purposes including: purchase price allocations, goodwill impairment testing, sales and acquisitions, corporate planning, establishing royalty rates, strategic alliances, financing transactions, and cost-sharing arrangements. The valuation of intangible assets often involves linking cash flows to each asset class and developing supportable risk rates for those assets. The cash flows and risk rates for each intangible asset are determined by an analysis of a variety of factors, including the economic value of the assets to its owners, the enhancement the asset may provide to other assets, the intended future utilization of the asset, and the economic life of the asset. An appraiser may also consider market transactions for similar intangible assets; however, due to the diverse attributes and unique qualities of intangible assets, the comparability of market transactions is often limited.
Purchase Price Allocations
Purpose: Tangible and intangible assets must be valued to ensure proper financial reporting and income tax treatment after a business combination.
The authority on purchase price allocation for financial accounting purposes under Generally Accepted Accounting Principles (US GAAP) is Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805: Business Combinations. A business combination occurs when an entity acquires the net assets that constitute a business, or acquires controlling equity interests in another entity. All business combinations must be accounted for using the purchase method of accounting. Acquiring entities shall allocate the cost of an acquired entity to the assets acquired and liabilities assumed as of the date of acquisition (based on their estimated fair values). The Securities and Exchange Commission and the Internal Revenue Service will scrutinize the allocation of the purchase price to ensure proper treatment. Independent valuations may provide evidence of proper compliance.
An intangible asset shall be recognized as an asset apart from goodwill if it arises from a contractual or other legal right, or if it is separable (i.e., capable of being separated or divided from the acquired entity and separately sold, transferred, licensed, rented or exchanged). Some common intangible asset categories and assets include the following:
- Technology-based Intangibles
– Developed Technology
– Patents and Trade Secrets
– In-process Research and Development
- Trademark/Trade Names
- Customer-related Intangibles
– Customer Relationships
– Customer Lists
- Non-competition Agreements
- Assembled Workforce
- Contract-based Intangibles
– Licensing/Royalty Agreements
– Leases and Supply Agreements not at Market
For income tax accounting purposes the Internal Revenue Code (“IRC”) §1060 dictates the provisions for intangible assets acquired as part of the lump sum purchase. IRC §1060 requires that the seller and purchaser each allocate the consideration paid or received in the transaction among the assets transferred in the same manner as amounts are allocated under IRC §338(b)(5).
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Goodwill Impairment Testing
Purpose: Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350 – Goodwill and Other, requires an annual impairment test of goodwill, at a level of reporting referred to as the reporting unit.
According to ASC 350, entities have the option to assess qualitative factors and to determine whether a goodwill impairment test is necessary prior to performing the first step of the two-step goodwill impairment test. In other words, entities are not required to calculate the fair value of a reporting unit unless it is more likely than not that the reporting unit’s fair value is less than its carrying amount. Alternatively, entities have an unconditional option to bypass the qualitative test and perform the first step of the goodwill impairment test directly.
The first step compares the fair value of the reporting unit with its carrying amount. The fair value of a reporting unit is the amount at which that unit could be bought or sold as a whole in a current transaction between willing parties, that is, other than in a forced or liquidation sale. If the fair value is less than the carrying amount, then the second step is performed, measuring the amount of the impairment loss, if any.
The second step is equivalent to a purchase price allocation. In a purchase price allocation, each asset and liability of the reporting unit must be identified and valued. Guidance for assigning values to assets and liabilities is provided in ASC 805. The amount by which the fair value established in step one exceeds the amount allocated to the assets and liabilities of a reporting unit is the implied fair value of goodwill. The excess of the carrying amount of goodwill over the fair value of that goodwill determines the amount of the goodwill impairment.
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Purpose: To assist boards of directors (“BODs”) in making reasonable judgments about business transactions and to provide protection under the business judgment rule.
A fairness opinion is an opinion as to whether a transaction is “fair, from a financial point of view.” It is not an opinion that the transaction is fair from a legal point of view, nor does it determine whether the transaction is a prudent business decision. Rather a fairness opinion assists the BOD and shareholders in making reasonable business judgments. It provides the BOD protection under the business judgment rule, which requires that the BOD meet standards of (1) due diligence, (2) independent and objective decision making, (3) good faith, and (4) absence of abuse of discretion. A fairness opinion can minimize the risk of litigation, correct misunderstandings, and provide comfort to the BOD and shareholders. Fairness opinions are beneficial when a company:
- Enters into a transaction with a related party;
- Receives competing bids that are different in price and/or structure;
- Sells material assets, stock, divisions or assets for cash and/or securities;
- Is offered common, preferred, convertible preferred or other securities in a public or private company as consideration;
- Acquires material assets, stock, a division or a subsidiary;
- Is concerned that some stakeholders might not understand the financial intricacies of a transaction;
- Receives a single bid and when the board has not solicited competing bids; or
- Repurchases outstanding securities.