The Professional's Guide to Fair Value

An all-encompassing guide to the elements and basics of fair value

With the important role fair value is playing in the creation of a converged set of global accounting standards, demand for products in this category is growing spectacularly. The elements and basics of fair value are covered, including risk, dealing with the SEC, and details on legal responsibility. In addition, sample financial statements are included, along with tables, recommended applicable techniques, and management checklists for those who are responsible for preparing and approving of financial statements.

• Written by the Chairman and co-CEO of the International Association of Consultants, Valuators and Analysts (IACVA)
• Includes sample financial statements of both U.S. and foreign companies

Appropriate for anyone involved professionally with finance—managers, accountants, investors, bankers, instructors, and students—The Professional's Guide to Fair Value is a reliable reference on the ins and outs of fair value financial disclosure.

Preface xi

Acknowledgments xv

Chapter 1: Significance of Value 1

Business Uses for Valuation 2

Mergers and Acquisitions 2

Financial Reporting 3

Investment Bankers versus Valuators 8

Valuation Requirements 8

Litigation Risks 9

Ten Commandments of Valuation 10

Chapter 2: Fair Value Concept 13

Relevant Pronouncements 14

Definitions 14

Market Participants 15

Fair Value Accounting 16

Revaluation under IFRS 16

Other Types of Value 17

Valuation Principles 19

Reporting and Cash-Generating Units 20

Chapter 3: Fair Value Framework 21

Stage 1: Determine the Unit of Account 22

Stage 2: Evaluate the Premise of Value 24

Stage 3: Assess the Principal Market 29

Stage 4: Establish the Most Advantageous Market 30

Stage 5: Select Appropriate Valuation Methods 33

Stage 6: Estimate Fair Value Conclusions 37

Chapter 4: Taming the Future 41

Definitions 42

Effect of Market Participants’ Assumptions 43

Scenario Analysis 45

Scenario Implications 49

Chapter 5: Projecting What Is to Come 53

Base the Future on the Past 54

The Truth Is in the Parts 56

Avoid Unnecessary Risks 59

Garbage In, Garbage Out 63

Believable and Likely Conclusions 66

Quality of Earnings 67

Conclusion 68

Chapter 6: The Market Approach to Fair Value 69

Nature of Markets 70

Classifying Assets 72

Comparable Transactions 74

Guideline Entities 76

Guideline Entities Example 79

Licensed Asset Example 82

Conclusion 84

Chapter 7: The Cost Approach to Fair Value 85

Current Replacement Cost 85

Deductions 87

Integrating the Factors 90

Residual Value 92

Useful Lives 92

Valuing Intangible Assets by the Cost Approach 97

Conclusion 103

Chapter 8: The Income Approach to Fair Value 105

Capitalization Methods 106

Income Approach—Discounting 110

Terminal Amounts 115

Application to Intangible Assets 116

Chapter 9: Sources of Value—Profits 121

Structure of Businesses 121

Innovation 122

DuPont Analyses 129

Chapter 10: Sources of Value—Risks 135

Reducing Risks 136

Continual Monitoring and Testing 136

Dealing with Biases 138

Risk Rate Component Model 139

Intellectual Capital Value Drivers 146

Conclusion 147

Chapter 11: Valuing Liabilities 149

Liabilities Transferred Rather Than Settled 150

Asset Retirement Obligations 157

Contingent Liabilities 158

Chapter 12: Business Combinations 161

Do Mergers Pay Off? 162

Why Merge? 163

Determination of Synergies 166

Intrinsic and Investment Values 167

Quantification 167

Chapter 13: Purchase Price Allocation 173

Stage 1: Determine the Acquirer 174

Stage 2: Establish the Consideration’s Fair Value 176

Knowledge of the Industry 178

Stage 3: Identify All the Items Involved 180

Stage 4: Select Appropriate Valuation Techniques 188

Stage 5: Estimate Fair Values and Reconcile Rates of Return 190

Conclusion 192

Chapter 14: Impairment 193

Reporting Units 194

Cash-Generating Units 196

Goodwill 197

Allocations 198

GAAP Long-Lived Assets Impairment Test 198

IFRS Impairment Test 200

GAAP Goodwill Impairment Test 202

Chapter 15: The Auditor’s Blessing 207

Auditing Fair Values 208

Conclusion 220

About the Author 221

Index 223

James P. Catty has been engaged in business valuations around the world for more than fifty years and has undertaken speaking engagements in China, Germany, Romania, Taiwan, Turkey, the U.K., and the U.S. He is Chairman of the International Association of Consultants, Valuators and Analysts (IACVA); President of Corporate Valuation Services Limited (CVS), Toronto; and of counsel to Hanlin Moss, PS in Seattle, Washington, and Xi'an, China. Catty is the author of the Wiley Guide to Fair Value under IFRS.

The Professional's Guide to Fair Value The Future of Financial Reporting

Over the past ten years, fair value has been growing in importance, with the concept undergoing substantial changes and refinements. On May 12, 2011—a red-letter day in financial reporting history—the Financial Accounting Standards Board (FASB) issued a revision of ASC 820, Fair Value Measurements, and the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 13, Fair Value Measurement. These virtually identical documents gave the financial world a single definition and framework uniting Generally Accepted Accounting Principles (GAAP) in the United States with IFRS. Written to keep you abreast of these recent changes and major revisions, The Professional's Guide to Fair Value provides all the essentials you need to comprehend, assume responsibility for, and sign off on financial statements with confidence.

Author James Catty—who has created methodologies and models for valuations acceptable to the SEC, Canadian Stock Exchanges, NASDAQ, and London Stock Exchange—shares his more than fifty years of global business valuation experience to provide you with the current elements and basics of fair value. The Professional's Guide to Fair Value walks you through most fair value financial reporting topics, including risks, dealing with auditors, and your responsibilities as they relate to fair value.

Oriented toward CPAs, auditors, valuators, boards of directors, investors, and bankers—anyone who needs to approve and/or understand financial statements??—this one-stop definitive resource for the most current fair value applications covers:

• Valuation principles

• The effect of market participants' assumptions

• Projecting what is to come

• How to avoid unnecessary risks

• Believable and likely conclusions

• The nature of markets

• Comparable transactions

• Current replacement cost

• Sources of value: profits and risks

• Valuing liabilities

• Quantification of synergies

• GAAP Long-Lived Assets Impairment Tests

• IFRS Impairment Test

• GAAP Goodwill Impairment Tests

• Auditing fair values

Every entity, whether a corporation, trust, partnership, limited or unlimited company, or even a proprietorship, is likely to have at least one intangible asset on its balance sheet. Make sure all your assets are accurately valued with The Professional's Guide to Fair Value.

Sign off on financial statements with confidence with the professional guidance found in The Professional's Guide to Fair Value

When considering a substantial business deal—whether a major expansion, significant acquisition, plant closure, or considerable divestiture—a go/no-go decision has to be made, based on a bottom line calculated from sometimes inadequate information. The key questions you need to answer are: how much value will be created, and for whom? Learn how to skillfully assess and report your answers with The Professional's Guide to Fair Value.

Based on the recent substantial changes to fair value rules as well as author James Catty's fifty years in business valuations around the world, The Professional's Guide to Fair Value provides the elements and basics of fair value, allowing you to grasp all the applicable elements and adhere to them as required. This comprehensive resource helps you understand the basics so that you may understand financial statements with certainty.

Filled with sample financial statements, tables, recommended applicable techniques, and checklists, The Professional's Guide to Fair Value reviews:

• The ten commandments of valuation

• The fair value concept

• Reporting and cash-generating units

• The six stages of fair value: a framework

• Projecting what is to come

• The market, cost, and income approaches to fair value

• Sources of value

• Valuing liabilities

• Mergers

Don't let uncertainty sabotage the value of your assets. The Professional's Guide to Fair Value helps you achieve uniformity and consistency in valuation and financial reporting.