Spring 2021


Thought Leadership in Fair Value Measurements

Editor for This Issue: Nathan P. Novak

Private Company Council Recent Developments Thought Leadership

Thought Leadership Discussion:
The Private Company Accounting Alternative and Intangible Asset Valuation Considerations
Terry G. Whitehead, CPA, and Tia Hutton
Owners and managers of private companies that have completed a business combination (i.e., an acquisition) often conclude there is no need to identify or value the acquired intangible assets. This is because such private company owners and managers may believe that “no intangible assets were acquired.” This statement may be true in certain acquisitions. However, it is inappropriate for a private company acquirer to ignore this financial accounting requirement without considering all of the facts and circumstances related to each acquisitive transaction. In addition, it is a common misconception that a company which has elected the private company accounting alternative is no longer subject to intangible asset valuation requirements with regard to its business acquisitions.

Private Company Council Accounting Standards Update: Overview of Practical Expedient for ASU Topic 718— Stock Compensation
Michael L. Binz
Efforts to simplify private company financial accounting standards under U.S. generally accepted accounting principles (“GAAP”) have progressed, thanks in part to the work of the Private Company Council (“PCC”). The PCC serves as an advisory board to the Financial Accounting Standards Board (“FASB”). The PCC was established in 2012 by the Financial Accounting Foundation to provide guidance on an alternative reporting framework within GAAP for private companies—in response to concerns about the cost and complexity of compliance with GAAP. In August 2020, the PCC proposed a practical expedient for private companies to determine the current share price for stock-based compensation awards under FASB Accounting Standards Update Topic 718—Stock Compensation. This discussion summarizes the history and function of the PCC. And, this discussion describes the recent guidance for the practical expedient proposed by the PCC for private company equity-based share awards.

Intangible Asset Valuation Best Practices Thought Leadership

Selection and Adjustment of CUT Royalty Rates in the Relief from Royalty Method Valuation Analysis
Nathan P. Novak
The relief from royalty (“RFR”) method is one of the generally accepted income approach methods of intangible asset valuation. One of the components of the RFR method involves the analyst’s selection of an appropriate arm’s-length royalty rate. There are several generally accepted methods that an analyst may apply in the estimation of that arm’slength royalty rate. One of the generally accepted methods involves the analysis of so-called comparable uncontrolled transactions, or “CUTs.” This discussion summarizes the generally accepted procedures related to the identification, selection, and adjustment of CUT intangible asset license agreements in the application of the RFR valuation method.

Best Practices Discussion:
Application of the Tax Amortization Benefit Valuation Adjustment
Lisa H Tran and Travis C. Royce
The so-called tax amortization benefit (“TAB”) adjustment represents the present value of the federal income tax savings resulting from the tax amortization of an acquired intangible asset over a statutory period. Internal Revenue Code Section 197 allows the cost of certain acquired intangible assets to be amortized for federal income tax purposes. However, not all acquired intangible assets are subject to such amortization tax deductions. Analysts should apply the so-called TAB adjustment to an intangible asset valuation analysis only when it is appropriate. This discussion summarizes what analysts should know before applying the TAB adjustment to an intangible asset valuation analysis.

Best Practices Discussion:
Applying the Cost Approach in the Fair Value Measurement of Intangible Assets
Robert F. Reilly, CPA, and Nathan P. Novak
A valuation analyst (“analyst”) may be asked to perform intangible asset valuations for a variety of reasons. A fair value measurement for financial accounting (e.g., for purposes of intangible asset impairment testing or business combination acquisition accounting) is one reason why an analyst may be asked to value intangible assets. The cost approach is one of three generally accepted intangible asset valuation approaches. The cost approach may be particularly applicable to the fair value measurement of certain types of intangible assets. This discussion summarizes the best practices related to the application of the cost approach to intangible asset valuation, particularly in the context of a fair value measurement assignment.

ASC Topic 805, Business Combinations, Thought Leadership

The Fair Value Measurement of Earnouts and Contingent Consideration in the Context of ASC Topic 805: Business Combinations
George Haramaras
This discussion focuses on the fair value measurement of contingent consideration in business combinations for financial accounting purposes. This discussion focuses on the fair value measurement of earnouts. First, this discussion defines and distinguishes the three post-acquisition mechanisms that are often discussed in conjunction with each other: (1) the working capital adjustment, (2) the indemnification escrow account arising from the representations and warranties section in the purchase agreement, and (3) the earnout. These mechanisms are sometimes—though not always—considered contingent consideration. Then this discussion defines and reviews the accounting treatment and standards for contingent consideration. This discussion considers the various types and structures of earnouts, as the specific attributes and structure of earnouts are particularly important in the fair value measurement. Finally, this discussion examines the valuation of earnouts. Specifically, this discussion addresses the relevant principles and factors the analyst should consider in the fair value measurement of earnouts. And, this discussion considers the generally accepted valuation methods applied in the fair value measurement of earnouts.

Fair Value Measurements in Business Combinations and Bargain Purchase Transactions
John C. Kirkland, CPA, and F. Dean Driskell III, CPA
This discussion summarizes the fair value measurement guidance and financial accounting considerations in business combinations—and specifically in bargain purchase transactions. This discussion describes the principles of the acquisition accounting method as it relates to fair value measurement. And this discussion describes many of the valuation analyst considerations with regard to fair value measurements for a bargain purchase transaction.

Understanding a Business Combination Transaction versus an Asset Purchase Transaction
Kevin M. Zanni
Valuation analysts (“analysts”) who provide specialist services related to business combination financial accounting should be aware of certain basic processes and procedures. Such analysts need to review and understand recent professional guidance introduced by the Financial Accounting Standards Board (“FASB”). The FASB regularly issues updates and modifications to U.S. generally accepted accounting principles (“GAAP”). The FASB promulgates these GAAP changes through the issuance of Accounting Standards Updates (“ASUs”). These ASUs affect fair value measurements for financial accounting purposes. Certain ASUs are more significant than others with regard to fair value measurements. One of the more significant and recent ASUs is ASU 2017-01, which involves the definition of a transaction as either a business combination or an asset purchase. Analysts should be aware that there are important differences between the financial accounting treatment and fair value measurement of a business combination transaction versus that of an asset purchase transaction.