FASB 141/142 Fair Value Reporting
The Financial Accounting Standards Board (FASB) was established to improve consistency in the reporting of financial documents such that they are comparable and meaningful. SFAS 141 and 142 cover the valuation of intangible assets for financial reporting. Up until these pronouncements, financial statements followed historical cost reporting. Figures were precise and estimations or calculations were not employed, but the figures were often irrelevant. For example, the reported cost of a building from 20 years ago is calculated to the penny; but, this is not financially relevant to the current reader of the financial statements.
With SFAS 141, financial statements are moving toward a new paradigm of fair value reporting, and away from the old paradigm of historical cost reporting. Currently, financial statements have a mixed-attribute model where only acquired intangibles are reported at fair value. Most other assets remain at historical cost and internally generated intangibles are not shown.
SFAS 141 was revised in 2007 effective for all transactions after 12/15/08 to modify the financial reporting of assets acquired in mergers and acquisitions. Under the new ruling the acquirer recognizes and identifies assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. A bargain purchase is recognized as a gain. SFAS 141 applies to all transactions in which an entity obtains control of one or more businesses, and includes mergers and combinations where no consideration is transferred. SFAS 141 does not apply to a joint venture, a group of assets that does not constitute a business or a combination between entities or businesses under common control.
Under the new ruling the costs associated with the acquisition are reported separately from the acquisition. Additionally, in-process research and development (IPR&D) (current and future technology) is no longer written off. When IPR&D is determined to be feasible, it is capitalized and amortized. IPR&D is written-off if and when it is abandoned.
Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price concept, namely the price that would be paid by a market participant for the asset.
Under SFAS 142, all goodwill acquired in a business combination should be assigned to the reporting units expected to benefit from the synergies between the buyer and target. The standards changed to allocate the intangible asset values independently rather than in one group because intangible assets are a growing portion of corporate value. Goodwill without clarification gives little information of the value of the entity and the underlying assets. Goodwill and some intangible assets are no longer amortized as they were under the previous standards. Based on the new approach goodwill and some other intangible assets are not considered wasting assets with finite lives, but should be tested annually for impairment and reallocated if impairment is found.
USPAP requires that the cost, income and market approaches must all be considered.
Intangible assets commonly valued under the cost approach include:
- Assembled workforce
- Internally used software
- Patient records
- Databases
- Designs etc.
Intangible assets commonly valued under the market approach include:
- Domain names
- Franchise rights
- FCC licenses
- Routes etc.
Intangible assets commonly valued under the income approach include:
- Trade names or trademarks
- Technology (sold to customers)
- Customer relationships
- Proprietary products e.g. drugs
An assembled workforce, although not assigned a value apart from goodwill, must be valued to determine the contributory charge when other intangible assets are valued using the Excess Earnings Method.
Sack Associates can help you determine, test, and report the value of intangible assets for financial reporting purposes.