Service

FINANCIAL REPORTING

Fair Value Measurement

Our valuation professionals are experienced in the latest accounting guidance for determining fair value of tangible and intangible assets acquired as part of a transaction and testing fair value measurements. Our experience has developed out of analysis conducted in various industries for small and large transactions. The scope of our fair value experience includes, but not limited to the following:

Business Combinations.
Goodwill and Other.
Fair Value Measurement and Disclosure.
Accounting for the Impairment or Disposal of Long-Lived Assets.
Reorganizations.
Accounting for Stock-Based Compensation.
Accounting for Derivative Instruments and Hedging Activities.

Business Combinations (ASC 805)

Financial Accounting Standards Board Accounting Standards Codification (ASC) 805 (formerly FAS 141R) governs the accounting and reporting of acquisitions that occurred in 2009 and beyond. This standard provides several substantive changes to the methodologies which must be employed when accounting for business combinations. When an acquisition occurs, a purchase price allocation must be performed in which the consideration paid is allocated across all acquired tangible and intangible assets.

- Contingent Consideration

ASC 805 describes contingent consideration as “an obligation of the acquirer to transfer additional assets or equity interests to the seller as part of the exchange for control if specified future events occur or conditions are met.

Under ASC 805, the acquirer must: recognize the arrangement in the acquisition method accounting at fair value and classify the amount as either a liability or equity in accordance with other existing U.S. GAAP guidance.

- Equity Securities Issued

ASC 805 requires that equity securities issued as consideration in a business combination be recorded at fair value as of the acquisition date. Under previous guidance, the acquirer’s equity securities were generally valued over a reasonable period before and after the terms of the business combination are agreed to and announced.

- Our Approach

Sycamore Valuation provides technical expertise to solve complex issues relating to mergers and acquisitions. We utilize commonly accepted valuation methodologies to derive supportable valuations for assets identified, contingent consideration, and equity issuance in connection with a purchase price allocation. We engage the audit team early in the process to better facilitate the review process and reduce the time and burden on management. Our work is respected by the Big Four and regional accounting firms.

Goodwill and Other Intangibles Impairment (ASC 350)

Businesses must perform the Goodwill Impairment Test on an annual basis (with certain exceptions) under ASC 350 (formerly FASB 142). This testing process must be conducted at the reporting unit level, defined as the lowest level of an entity, i.e., business units, subsidiaries, operating units, divisions, etc. There are two steps to the testing process:

First step, companies must identify potential impairments by comparing the fair value of equity of a reporting unit to its carrying equity amount, including goodwill. Goodwill impairment does not occur as long as the fair value of the unit is greater than its carrying value. The second step of the test is only required if a goodwill impairment is identified in step one.

The second step of the test compares the implied fair market value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value, and it must be presented as a separate line item on financial statements.

Long-Lived Assets Impairment (ASC 360)

ASC 360 (formerly SFAS 144), governs the accounting treatment of finite-lived assets. ASC 350, a two-step test is required to evaluate impairment. However, unlike ASC 350, the initial test involves the utilization of undiscounted cash flows associated with the finite-lived asset. An impairment loss is recognized only if the carrying value of the asset is not recoverable and exceeds its fair value. The carrying value is considered unrecoverable if it exceeds the sum of the undiscounted cash flows anticipated from the use and disposition of the asset. Impairment loss is measured as the amount by which the carrying value of an asset exceeds its fair value.

Reorganizations (ASC 852)

Public and private entities that emerge from Chapter 11 bankruptcy are subject to ASC 852-Reorgizanations. Fresh start accounting was previously covered under the American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”. Under FASB ASC 852, certain emerging entities will adopt fresh start accounting, which calls for them to apply fair value concepts in determining their reorganization value and establishing a new basis for financial reporting. This type of accounting involves implications related to valuation, accounting, and taxes.

Stock-Based Compensation (ASC 718)

ASC 718 mandates that companies must expense stock options and other forms of equity-based employee compensation. Additionally, companies must provide the basis to determine its total equity value. Depending on the number of employees receiving awards, the frequency of grants, and the variability of the terms, ongoing administration and compliance can pose a significant burden. We have in-depth expertise in determining the underlying security’s value.

- Methodologies

The Black-Scholes-Merton (BSM) Model,the LatticeModel, and the Monte Carlo Simulation (MCS) Model, are among the valuation models that meet the criteria required by ASC 718 for estimating the fair value of employee stock options. ASC 718 does not explicitly recommend a particular option-pricing model for the valuation of employee stock options; however, the FASB and AICPA suggest that in many circumstances a Lattice or MCS model will provide a better estimate of the fair value of certain employee stock options compared with BSM model

ASC 718 provides that if BSM is used to estimate the fair value of stock options, the formula must be adjusted to take account of certain characteristics of employee share options and similar instruments that are not consistent with the model’s assumptions (for example, the ability to exercise before the end of the option’s contractual term). The BSM model may also be modified to include additional assumptions to incorporate the diluting effect of options, warrants and other equity-indexed financial instruments on the value of the stock if dilution is considered a substantive characteristic of the financial instrument.

Due to the limitations in the adjustments which can be made to the BSM model, this model is only considered appropriate for ‘plain-vanilla” options which do not contain any market conditions. ASC 718 indicates that using a more complex valuation model such as a Lattice or Monte Carlo model should be used to take into account variables such as employee exercise patterns based on changes in the company stock price or market conditions.

Derivatives and Financial Instruments (ASC 815)

ASC 815-Accounting for Derivative Instruments and Hedging Activities, provides guidance on the specific accounting treatment of financial derivative instruments. Equity related instruments or embedded features are accounted for at fair value as either an asset or liability, depending on — among other considerations — if the instrument is indexed to the issuer’s own stock. The classification has been the topic of a number of additional FASB pronouncements, such as the Emerging Issue Task Force (EITF)Issue No.07-5. Common provisions such as anti-dilution clauses in convertible securities or equity warrants may lead to an accounting treatment as a liability with a resulting requirement to value these instruments at fair value in each reporting period.

- SEC guidance for valuing derivatives

Recent SEC guidance and comments regarding smaller issuers criticize the widespread but incorrect use of the Black-Scholes model for the valuation of complex derivative securities that incorporate embedded features. The SEC recommends more advanced techniques such as the Binomial Lattice Model or a Monte Carlo Simulation to correctly value these features.

Industries We Serve

Media & Entertainment

Oil & Gas

Hedge Funds

Power & Utilities

Banking & Security

Automotive

Federal Government

Customer Products

Real Estate

Technology

Telecom

Health Care

Aerospace & Defence

Private Equity

Life Sciences