bva july 2009

JULY2009

VOL. 10, ISSUE NO. 3

CONTENTS

CONTINUED ON PAGE 10

1 Impairment Testing of Goodwill, Indefi nite and Long-lived Assets in the Current Environment

2 Editors’ Column

3 Social Media: What Is It and Should You Care?

6Social Media Is Here To Stay

7 A Tale of Two FLP Estate Tax Cases: Facts and Judges Differ

9 ASB Adopts New Disclosure Requirements for 2010-2011 Edition of USPAP

15 Calendar

Impairment Testing of Goodwill, Indefi nite and Long-lived Assets In the Current Environment by PJ Patel, CFA, ASA

The current fi nancial and economic envi-ronment has had a signifi cant impact on fi nancial statements. As companies test their assets for impairment, many have taken signifi cant non-cash impairments of goodwill, intangible assets, and even PP&E, causing their balance sheets to shrink. As the economic turmoil persists, companies will continue to recognize im-pairments on a variety of assets.

Under US GAAP, impairment testing is covered by SFAS Nos. 142 and 144. SFAS No. 142 provides guidance on the testing and impairment of goodwill and indefi nite-lived intangibles; SFAS No. 144 provides guidance on the testing and impairment of long-lived assets. These documents are supplemented by other FASB literature such as SFAS No. 157, EITF 02-7, EITF 02-13 and various SEC speeches and audi-tor interpretations.

Background: The Structure of Impairment Testing SFAS Nos. 142 and 144 collectively provide guidance for testing goodwill, indefi nite-lived and long lived assets for impairment. While each asset category has a unique testing methodology, together a systematic approach (and closed model) for impairment testing is evident. Impair-

ment amounts are allocated to identifi able impaired assets before fi nally determining goodwill impairment. No asset is impaired to a value that is less than its fair value.

Order of Operations The testing methodology requires in-defi nite-lived assets to be tested fi rst, followed by long-lived assets, and fi nally goodwill. In each step, the carrying value of assets is adjusted before subsequent impairment tests.

For instance, the order of operations for impairment testing of a company with a single reporting unit which consists of a single asset group and a single indefi nite-lived trademark would be as follows.

1. Trademark would be tested for impair-ment. If impaired, the carrying value of the trademark would be adjusted for the calculated amount of the impairment.

2. The asset group would be tested for impairment by comparing undiscounted cash fl ows with the fair value of the as-set group including the trademark at its adjusted fair value. a. If the asset group was determined to

be impaired, the carrying value of long lived assets would be adjusted for impairment.

3. Goodwill impairment is tested by com-paring the fair value of the reporting unit to the carrying value based on prior adjustment/impairments. The fair value

2

JULY 2009

EDITORS’ COLUMN

CONTRIBUTING EDITORSGeorge B. Hawkins, ASA, CFAMichael A. Paschall, ASA, CFA, JDMANAGING EDITORKurt DiefenbachEDITORLou DagostinoElaine StattlerLaura Naus HollandPUBLICATION DESIGNDon Torres

CCH BUSINESS VALUATION ALERT (ISSN 1520-3158), published quarterly by CCH, a Wolters Kluwer business, 4025 W. Peterson, Ave., Chicago, Illinois 60646-6085. POSTMASTER: SEND ADDRESS CHANGES TO CCH BUSINESS VALUATION ALERT, 4025 W. Peterson Ave., Chi-cago, IL 60646. Printed in U.S.A. ©2009 CCH. All Rights Reserved.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, ac-counting or other professional service, and that the au-thors are not offering such advice in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. All views expressed in the articles and columns are those of the author and not necessarily those of CCH or any other person.

George B. Hawkins is president of Banis-ter Financial, Inc., a fi rm in Charlotte, North Carolina, specializing in business valuations. He is certified as an Accredited Senior Ap-praiser (ASA) in busi-ness valuation and a Chartered Financial Analyst (CFA). He also

has an M.B.A. from Wake Forest University and is the current Vice Chair of the Interna-tional Board of Examiners of the American Society of Appraisers’ business valuation section. Hawkins serves as an elected member of the Business Valuation Committee of the American Society of Appraisers.

Michael A. Paschall is executive vice presi-dent and a director of Banister Financial, Inc., a firm in Char-lotte, North Carolina, specializing in busi-ness valuations. He is certifi ed as an Accred-ited Senior Appraiser (ASA) in business valu-ation and a Chartered

Financial Analyst (CFA). He also has a J.D. from Wake Forest University and is an Advi-sor of the International Board of Examiners of the American Society of Appraisers’ business valuation section.

The turmoil in the stock market has led to a dramatic increase in goodwill impairments. According to a recent study released by PricewaterhouseCoopers, Fortune 500 companies announced $230 billion of impairments from third quarter 2008 through March 20, 2009. That amount is more than double the amount on record for Fortune 500 companies for the prior three years!

To provide some insights into this timely topic, we have an article by PJ Patel, CFA, ASA, of Valuation Research Corporation, “Impairment Testing of Goodwill, Indefi nite and Long-lived Assets in the Current Environment.” The article discusses SFAS Nos. 144 and 142, which “together provide a comprehensive framework for testing the various long-lived and indefi nite lived assets for impairment.”

Continuing our discussion of FLPs from our last issue, we have another article by Owen G. Fiore, JD, of Fiore Wealth Planning Consulting. “Tale of Two FLP Estate Tax Cases: Facts and Judges Differ” reviews two recent FLP estate tax cases: Estate of Erma V. Jorgensen v. Commissioner et al. , TC Memo 2009-66, and Estate of Valeria Miller v. Commissioner , TC 2008-128.

“Perhaps the primary lesson to be learned in analyzing these new cases is that each FLP/FLLC case is unique,” writes Fiore, “not only by reason of varying facts but also due to the individual Tax Court judge’s evaluation of case specif-ics and developed views on estate tax issues involved.”

Fiore notes that “business valuation appraisers can learn from these cases about the key factors considered important in determining whether the pass-through entity, whether an FLP, FLLC, or even an S corporation, will be respected for

estate tax purposes.”

Rounding out our issue is an article by Barbara Walters Price, Senior Vice President of Marketing for Mercer Capital Management, on using social media to market your business valuation practice. “If the idea of social media intrigues you and you can see benefi t to you and your fi rm, begin to participate,” advises Price.

“Social Media: What is It and Should You Care?” discusses how busi-ness valuation professionals can best utilize social media tools such as LinkedIn, Google Profi le, Twitter, and blogs. Price warns, though, that “social media can distract you from the importance of other marketing tools.” “Don’t neglect e-mail newsletters, direct mail, and other targeted marketing tactics,” Price advises. “While social media extends your reach, it is a tool in your toolbox. It is not the toolbox.”

— George B. Hawkins

— Michael A. Paschall

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JULY 2009

Social Media: What Is It and Should You Care? by Barbara Walters Price

Overview Social media tools have transformed the Web from a one-way communication vehicle to a real-time and interactive medium.

This article is addressed to business valuation professionals. Its purpose is to help you make sense of social media and decide if it is right for you and your practice.

We will introduce a few tools that might be useful, talk about the potential benefi ts and shortcomings of your participation, and suggest a strategy to help get started, should you decide to test the waters.

Social Media Can Help You and Your Firm The greatest potential benefi t of social media is its ability to generate broader exposure for you and your fi rm. This expo-sure will result in:

■ Networking opportunities with current clients, as well as people you would not otherwise have knowledge of or access to;

■ Increased traffi c to your Web site; ■ A rise in the search rankings for you and/or your fi rm; ■ Strengthening of your personal and professional brand; and ■ A powerful recruitment and retention tool for the millennial

generation.

FIGURE 1

Many successful business appraisers get their best work by word-of-mouth marketing (referrals). Increasingly, social media is moving word-of-mouth marketing online. Here are some examples of this phenomenon from law fi rms using LinkedIn 1 and Twitter:

■ “Attorney Thomas N. Shorter … a shareholder in the Madi-son offi ce of Godfrey & Kahn, S.C., says he has LinkedIn set as his homepage. Every time one of his 200 or so con-nections adds a connection, he is notifi ed of that. If the new connection is someone that Shorter would like to know professionally, he telephones his connection and asks him or her to make an introduction. This has happened a number of times since joining LinkedIn … and he has garnered a number of new cases and clients via this method.”

■ “Among the Davis & Kuelthau s.c. lawyers … was a partner who was skeptical [of social media] at fi rst. But … in response to two of his e-mails asking clients to connect, not only did they accept his invitation, but also, they contacted him, saying “I’ve been meaning to get in touch with you about …. Two new matters landed on his plate, with very little effort on his part.”

■ Rick Telberg, president and CEO of Bay Street Group LLC and well-known author of CPA Trendlines , retells the Twitter success story of Andrew Rose, director of marketing and business development of Naden/Lean CPAs of Timonium, Maryland. Twitter helped Naden/Lean improve their search engine ranking. Per Andrew: 2

… I started Twitter searching to see what people were saying, er, tweeting, about us. You can imagine my sur-prise when I found a post related to an industry niche blog we run describing how valuable our advice was. It was from someone I didn’t know. So I began following him and thanked him for recognizing us in this public fashion, unsolicited.

And, the kicker? His tweet, reposting a link to our in-dustry blog now ranks in the top 20 for a keyword in an organic Google search.”

Focus on Giving, Not Getting To be effective in social media, you need to approach it with the right attitude. Focus on giving—providing information and resources. From there, you will see the most benefi t.

Says Debra Helwig, marketing communications manager of IGAF Worldwide and author of the blog Service Minded (www.debrahelwig.wordpress.com) “All of it [social media] is putting bread on the water. You have to focus on giving, not getting. You must fi rst be ready to learn and absorb and give back.”

Select the Right Tools It has been said that 80 percent of the fuel on the space shuttle is used to get the shuttle into orbit, and rest of the mission relies upon the remaining 20 percent. So it is with social media. 80 percent of your efforts will be dedicated to just getting off the ground, so choosing the right tool is important.

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4 © 2009 CCH. All Rights Reserved

JULY 2009

If you are ready to jump into social media, let me offer the following advice to business valuation professionals based upon my experience as the marketing director in a business valuation fi rm. The tools recommended below are listed in order of importance given the limited time resources every business appraiser has.

LinkedIn. LinkedIn is a business-oriented social networking site designed for professional networking. This fact sets it apart from other popular social networking sites. LinkedIn is a powerful networking tool if used correctly.

If you only have time to commit to one social media tool, make it LinkedIn. Join LinkedIn, complete your profi le, join several LinkedIn groups, and begin to build your network of “connections,” as LinkedIn calls your contacts.

Leverage the tool by updating your status at least weekly. Reach out to contacts for their input on article ideas or speeches, upload recent presentations, let your connections know when you will be in town, and join in the discussions in groups to which you belong. Once your profi le is complete, spend at least an hour a week on LinkedIn, building your contact base. A tutorial on LinkedIn is beyond the scope of this article, but begin with the Help section of the service itself. In addition, there are several other Web sites that offer useful information. 3

Chris Mercer, CEO of Mercer Capital, recently sent an e-mail to his LinkedIn connections to solicit advice on an upcoming speech. “I received three responses on areas that I had not thought to touch on but they ultimately enhanced the speech. I saw two other benefi ts from this use of LinkedIn. I commu-nicated to my network that I was speaking on this topic and then I sent a copy of the PowerPoint slides after the speech as yet another touch. Without the functionality of this tool, this would have been too diffi cult to even attempt.”

Why is LinkedIn my fi rst recommendation? As of May, 2009 LinkedIn had more than 40 million registered users spanning 170 industries. 4 LinkedIn is free to use, although there are paid options that allow greater fl exibility in contacting others.

Remember that we have to know our target market(s). Attorneys are still a valued referral source category for many business ap-praisers, and attorneys have embraced LinkedIn. As of June 2009, LinkedIn shows 840,000 people within the law practice industry and, of those 840,000, a high percentage are lawyers. 5 That is a 106 percent increase from December, 2008. 6 So you’ll want to spend time where many in your target market spend time.

Google Profi le. Google handles millions of vanity searches every day (“googling yourself”). To provide more control

over search results, Google has provided Google Profi le, which allows users to create a one-page bio. Users can add links to Web sites, blogs, on-line photos, and other social networking profi les such as LinkedIn and Facebook. People will see it on their results page when they do a Web search for the user’s name.

To create a profile of your own, create an account with Google. Then visit www.google.com/profi les/me and follow the directions. A profi le can be completed in less than an hour. Remember to set up a profi le page for your fi rm as well. (For an example of a Google Profi le, visit mine at www.google.com/profi les/barbarawaltersprice.)

Twitter. Twitter is a free micro-blogging site. Entries, known as tweets, are limited to 140 characters. Twitter seems to be more of a one-way, one-to-many communications tool rather than a two-way, peer-to-peer communications network, yet it is worth considering.

My advice is to begin to fi nd people to follow (via Twitter search, Twibes, or FollowMe), then lurk for a while to see what others are saying about you, your fi rm, or a practice niche. Then decide if you have the time to contribute content or can offer content that others might fi nd useful. Focus the content on the professional, not the personal.

Twitter is a useful tool to point followers back to your Web site or blog. If you have 15 to 30 minutes a day to devote, and you have worthwhile content, give it a try. 7

You can also use Twitter to help obtain press coverage. There are thousands of reporters on Twitter. Find those who write about subject matter you can comment on, and follow them. You might learn of a story they are writing to which you can contribute.

According to Compete.com, as of February 2009, Twitter was ranked as the third most used social networking site 8 although as of May 2009, its growth appears to have slowed. 9

Blog. The term “Blog” is an acronym for “Web log” and is a type of Web site designed for journal-type entries. Each entry, or post, is presented in chronological order with the most recent post top-ping the list. Most blogs are textual, yet some are video-oriented (vlogs), audio-oriented (podcasts), or photo-oriented (photob-logs). Micro-blogging has also become popular via Twitter.

As of December 2007, Technorati.com was tracking 112 million blogs. 10 A little over half of all blogs tracked in 2008 concentrate on personal or lifestyle topics and over a quarter focus on business topics. 11

A blog, done well, can be an extremely effective marketing tool. A blog can showcase particular expertise and experience. It can create a conversation with readers via the comment function. It can also improve search rankings and drive traffi c to your Web site.

Social MediaCONTINUED FROM PAGE 3

5

JULY 2009

While it is easy to set up a blog, it is diffi cult to maintain one. This is the reason it is listed fourth in order of importance on my list. A blog needs to have a sharp content focus and be constantly fed. Authors should post at least twice a week, preferably three times a week. This requires a large commit-ment of time and resources.

There is currently a void in the business valuation space for a well-written blog. Only a few business valuation-themed blogs could be identifi ed for this article and they are not often updated.

Before you begin to blog, know what your blog will be about, identify the author(s), draft several posts for future publication, and commit to it for at least a year. Then decide upon the ap-propriate blogging platform for your needs, design, and launch. Promote your blog in all your other marketing channels, link to other blogs, and leave comments on other blogs.

Jerry Work, president of Work Media Internet Marketing, says “Really, you just have to remember that you’re not blogging just to sell stuff—you are trying to build a community of people who are interested in what you have to say, and you are participating in a larger community-wide discussion that involves your blogs, as well as the blogs of others.” 12

Facebook. Lastly, consider joining Facebook. It is the most popu-lar free-access social networking site with more than 200 million users worldwide and over 60 million in the United States. 13

According to the istrategylabs.com 2009 Facebook Demo-graphics and Statistics report, the 35-54 year old demographic is growing fastest, followed by the 55-or-older group. The 25-34 year population is doubling every six months. 14

Facebook is primarily used for personal social networking (cur-rent friends, old friends from high school and college, family, etc.). Contacts are called “friends.” But many users also incor-porate professional applications. People use the status updates feature on Facebook to inform their network about blog posts, videos, or other items of broader professional interest.

Consider These As Well HARO. Subscribe to HARO, or Help a Reporter Out. Philip Shankman, a self-described CEO, entrepreneur, and adven-turer, began this project. Over 100,000 people subscribe to this free service. They receive at least three e-mails a day fi lled with queries from reporters about stories they are working on. The queries range from lifestyle to technology to business. If you see a query you can answer, contact the reporter directly. To subscribe, visit http://www.helpareporter.com.

Ning. Ning allows you to create your own social network around a subject of interest with your own visual design, choice of features and member data. Customization is an important feature, as users automatically have a customizable profi le page. Ning offers both free and paid options.

YouTube. YouTube allows users to upload and share video clips. You can also paste videos from YouTube to blogs, Web sites, and other social networking sites. Videos appear in Google search results and video. If thoughtfully done, YouTube can be an effective way to present yourself, your fi rm, or a particular topic of interest.

These are some of the most popular social media tools and those I believe might be most benefi cial to readers. This list is not all-inclusive. A more comprehensive list of social media marketing tools can be found at the blog Junta42blog. 15

Be Aware of the Possible Shortcomings Social media is not a panacea and it is not for everyone. Al-ways keep in mind that there are opportunity costs attached to everything we do. Consider the following:

1. Time. One of the biggest opportunity costs is time. Social media participation can be time intensive. Many marketing experts advise posting to a blog at least three times a week, tweeting at least three to fi ve times a day, updating your status on LinkedIn several times a week, participating in pertinent group discus-sions, and updating your Facebook status several times a week. Social media can easily consume half an eight-hour workday or more if you don’t have concrete goals and parameters.

2. Loose Cannons. Understand that you cannot always control the message. If your employees are engaged in social media, there is always the possibility that they may post something unfl atter-ing. For example, this year, an ad agency executive representing Ketchum was in town to make a digital media presentation to his client, FedEx, headquartered in Memphis, Tennessee.

The ad agency executive got into trouble when he tweeted unfl attering remarks about the city of Memphis. It turns out that FedEx workers were among his Twitter followers and they did not react well to a vendor insulting their city. It caused embarrassment on many levels.

Here’s the takeaway: If you, as an individual, believe in the virtues of being blunt, stay away from social media. People forget the massive reach of social media. Also, be aware that many, if not most, of your employees or colleagues are already engaged in social media in some form. A prudent course of action is to instate a social media policy at your fi rm. 16

In another example, two employees at Domino’s Pizza posted a supposedly humorous video on YouTube in which they were doing some disgusting things while making sandwiches. That video “went viral.” While these were isolated acts by employees who claimed they didn’t serve the contaminated food, they were subsequently arrested for food tampering and Domino’s had a huge PR catastrophe to deal with.

3. Distraction. Don’t ignore your other marketing tools. Social media can distract you from the importance of maintaining your other marketing strategies. Before spending a great deal of time on social media, make sure your Web site is up-to-date and full of useful content. Your Web site is still your premier marketing tool and each social media tool should drive traffi c to it. Don’t neglect e-mail newsletters, direct

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JULY 2009

mail and other targeted marketing tactics. Finally, and most important, social media does not take the place of in-person meetings. While social media extends your reach, it is a tool in your toolbox. It is not the toolbox.

Before you begin any marketing strategy, much less a social media marketing strategy, identify your target market(s), develop clear objectives, and devise a strategy. Then review a variety of social media tools and choose those that have the greatest chance to accomplish your goals.

Conclusion If the idea of social media intrigues you and you can see benefi t to you and your fi rm, begin to participate. As Kelly Hutson of ProCommunicator (www.procommunicator.com) wisely ad-vises, “I’d caution you not to jump into the deep end of the social media tool pool and start posting all your photos and commenting on the state of the Union. [M]ake a decision early on what each of these tools is meant to accomplish for you. Is it for personal relationships? Business contacts? Purely professional?”

I have found participation in social media to be both profes-sionally and personally rewarding. I have received invitations to speak and opportunities to publish articles directly as a result of my blog. In addition, search results for my fi rm improve when I post about the fi rm’s activities. Through my network on LinkedIn, I have met other professionals who I never would have otherwise known, and I have received invaluable help with publishing projects as well as marketing advice for my fi rm.

To quote a commenter to a recent blog post on social media, “At the end of the day it is about human interaction. It’s nothing com-plicated—technology simply empowers these processes.”17

Good luck in your journey.

Barbara Walters Price is the Senior Vice President of Market-ing for Mercer Capital Management, Inc., a business valu-ation and investment banking fi rm. E-mail her at [email protected], visit her blog, BW Price’s Marketing U, at www.bwprice.com, or link to her on LinkedIn at http://www.linkedin.com/pub/6/960/164. ◆

End Notes 1 Pribek, Jane, Wisconsin Law Journal , (September 22, 2008), “Attorneys

are Getting LinkedIn to Clients Online,” http://www.wislawjournal.com/article.cfm?recID71415 (Access June 15, 2009).

2 Telberg, Rick, CPA Trendlines (March 24, 2009), “How Twitter Launched a CPA Firm into the Top Google Rankings,” http://cpatrend-lines.com/2009/03/24/how-twitter-launched-a-cpa-fi rm-into-the-top-google-rankings (Accessed June 15, 2009).

3 Mashable , Wallace, Brian (November 2, 2008), “How to Get the Most Out of LinkedIn,” http://mashable.com/2008/11/02/reexamining-linke-din/ (Accessed June 16, 2009). Techlifeweb.com , “Become a LinkedIn Power User,” http://www.techlifeweb.com/2008/10/29/become-a-linked-in-power-user/ (Accessed June 16, 2009). LinkedIn Questions.wordpress.com: “LinkedIn Expert Advice & Insight Through Your Questions—A LinkedIn Blog That Goes Beyond the “Offi cial” Explanations,” http://linkedinquestions.wordpress.com/ (Accessed June 16, 2009).

4 Wikipedia , http://en.wikipedia.org/wiki/Linkedin (Accessed June 14, 2009). 5 Stem: Law Firm Web Strategy Blog , http://www.stemlegal.com/

strategyblog/2009/linkedin-lawers-hit-840k (Accessed June 12, 2009). 6 Ibid. 7 Mashable , Philip, Bruce, (June 12, 2009), “5 Habits of Successful Execu-

tives on Twitter,” http://mashable.com/2009/06/12/twitter-executives/ (Accessed June 15, 2009).

8 Compete.com. Kazeniac, Andy (2009-02-09). “Social Networks: Fa-cebook Takes Over Top Spot, Twitter Climbs,” http://blog.compete.com/2009/02/09/facebook-myspace-twitter-social-network/.

9 Harvard Business Blog , Heil, Bill and Piskorski, Mikolaj (June 1, 2009), “New Twitter Research: Men Follow Men and Nobody Tweets,” http://blogs.harvardbusiness.org/cs/2009/06/new_twitter_research_men_follo.html (Accessed June 15, 2009).

10 Wikipedia , http://en.wikipedia.org/wiki/Blog. (Accessed June 14, 2009). 11 Technorati , “State of Blogosphere 2008.” http://technorati.com/blogging/

SOCIAL MEDIA IS HERE TO STAY

Social media advocates proclaim that there is a sea change underway in the manner in which we communicate and dis-seminate information. What are some examples? ■ When a bystander snapped a picture on an iPhone of U.S. Airways Flight 1549 fl oating in the Hudson River and sent

it via Twitter to friends, who sent it to friends, who sent it to friends, and it appeared on local and national news—all in real time—that is social media in action.

■ When a 47 year old Scottish woman, Susan Boyle, wows Britain and the world via a YouTube video, that is social media in action.

■ When people create “groups” on Facebook around causes about which they are passionate and fi nd like-minded people to join who, in turn, fi nd like-minded people to join, that, too, is social media in action. It is what Seth Godin, marketing expert, calls creating “Tribes.”

One point should be acknowledged—social media is already a fact of life!

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JULY 2009

state-of-the-blogosphere/the-what-and-why-of-blogging/. 54% of blogs tracked focused on personal/lifestyle subjects. 27% of blogs tracked fo-cused on business topics.

12 Quoted from the soon-to-be-released, yet-to-be-titled social networking book written by Jerry Work of Work Media Internet Marketing. Jerry gra-ciously allowed me to review a draft copy. It is packed with useful infor-mation and it is not written in techo-speak. Any professional can pick it up and glean helpful information immediately to allow them to get started in social media. Visit http://.workmedia.net to inquire about the book.

13 Wikipedia , http://en.wikipedia.org/wiki/Facebook. (Accessed June 14, 2009). 14 Istrategylabs , http://www.istrategylabs.com/2009-facebook-demograph-

ics-and-statistics-report-276-growth-in-35-54-year-old-users/ (Accessed June 14, 2009).

15 Junta42blog , http://blog.junta42.com/content_marketing_blog/2009/06/42-online-content-sharing-and-productivity-tools.html.

16 For a good example of a social media policy template, see Law.com Legal Technology, Wong, James (June 15, 2009), “Draft-ing Trouble-Free Social Media Policies,” http://www.law.com/jsp/legaltechnology/pubArticleLT.jsp?id=1202431410095&src=EMC-Email&et=editorial&bu=LTN&pt=Law%20Technology%20News&cn=ltnda_20090615&kw=Drafting%20Trouble-Free%20Social%20Media%2-0Policies (Accessed June 17, 2009).

17 Comment from Adrian Eden (June 10, 2009) to the post “5 Biggest Les-sons I’ve Learned About Using Social Media” by Kelly Hutson (Pro-Communicator.com). http://www.procommunicator.com/social-media/the-5-biggest-things-ive-learned-about-using-social-media.

A Tale of Two FLP Estate Tax Cases: Facts and Judges Differ by Owen G. Fiore, JD

Overview In the last issue of Business Valuation Alert , the author provided a review of recent judicial decisions considering the gift and estate tax valuation discount viability of family limited partner-ships (FLPs) and family limited liability companies (FLLCs). In addition, “factors for success” with FLPs and FLLCs were outlined to encourage successful, positive planning. Now recent cases underscore the importance of carefully developed plan-ning and the necessity for monitoring FLP/FLLC plans.

This article reviews the specifi cs and planning impact of two more FLP estate tax cases, namely, Estate of Erma V. Jorgensen v. Com-missioner 1 and Estate of Valeria Miller v. Commissioner. 2

Perhaps the primary lesson to be learned in analyzing these new cases is that each FLP/FLLC case is unique, not only by reason of varying facts but also due to the individual Tax Court judge’s evaluation of case specifi cs and developed views on estate tax issues involved.

While in neither of the recent Tax Court cases was valuation an issue at trial, business valuation appraisers can learn from these cases about the key factors considered important in determin-ing whether the pass-through entity—an FLP, FLLC or even an S corporation—will be respected for estate tax purposes. Respecting the entity is what brings into play the “fair market value” determination of entity equity interests rather than only valuing the entity’s underlying assets.

In both Jorgensen and Miller , the FLP(s) owned principally mar-ketable securities. While in Jorgensen , two separate FLPs failed to achieve estate tax recognition, the court in Miller recognized the initial set of contributed assets to the FLP as resulting in a 35 percent valuation discount from net asset value (NAV); and

then concluded the second round of contributed assets were essentially testamentary in nature. Therefore, no discount was allowed as the FLP was ignored for estate tax purposes.

The Jorgensen Case One readily can see where Tax Court Judge Haines was headed by a statement included in his opinion, namely, that it was “…especially signifi cant that the transactions were not at arms-length and that the partnerships held a largely untraded portfolio of marketable securities.” The court did not believe there was enough investment activity or that the use of the FLP was needed, other than as merely a “discounting device.”

The author has discussed the opinion with the estate’s counsel and it appears possible that signifi cant pro-taxpayer evidence was overlooked or discarded by the court, so an appeal to the 9th Circuit Court of Appeals is possible.

1. Facts Are Important. Col. Jorgensen, a lawyer and career U.S. Air Force pilot, directed the family’s fi nancial affairs. He gradu-ally and carefully built up over a $2 million marketable securities portfolio. Gerald Jorgensen and his wife, Erma, were residents of Virginia and had two children and six grandchildren.

The thrust of the fi rst of two FLPs, which was established in 1995, was to develop a plan that would allow for annual gift transfers of partnership interests to the Jorgensen chil-dren and grandchildren. And, in point of fact, in the fi rst FLP, “discounting” was not even a goal!

Col. Jorgensen died in 1996, and thereafter, in advising Erma on her estate planning, two different lawyers emphasized valu-ation discounts. Their letters, which left unsaid many points apparently, were obtained by the IRS through discovery pro-ceedings. Judge Haines seemed to input to Erma Jorgensen and her family the lawyers’ suggestions, rather than to concentrate on Erma herself and her motivations for the partnerships.

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JULY 2009

The second partnership, formed by Erma following her hus-band’s death, was intended to track securities in a different way, especially as to income tax basis. Yet the court believed that a second entity was unnecessary, pointing to Erma’s living trust as a vehicle for asset management. Query: Is not the taxpayer gen-erally free to select among legally available entity alternatives, provided no entity is set up solely for tax avoidance purposes?

2. The Tax Court Analysis. First of all, the court refused to grant the estate’s motion to shift the burden of proof under Code Section 7491 to IRS on the fact issues in dispute. Judge Haines merely discarded 7491, indicating he would look at the burden of persuasion. Yet it appears the court failed in its opinion to take into account evidence (including testimony) as to the bona fi de nature of the FLPs, the family’s motive to share wealth among family members, and the lack of concern about valuation discounts in the fi rst FLP.

Judge Haines dealt with the litany of non-tax reasons for the FLPs as suggested by the estate’s counsel. This was done in the context of determining whether the “bona fi de sale” exception to application of Code Sec. 2036(a) was available to the estate. Section 2036(a) brings back into the estate lifetime transfers of property (here the marketable securi-ties contributed to the FLPs) where the transfers essentially are testamentary in nature. Citing the well-known Bongard case, 3 the court stated that the bona fi de sale exception is available “…where the record establishes the existence of a legitimate and signifi cant nontax reason for creating the FLP and the transferors received partnership interests proportionate to the value of the property transferred.”

A careful review of the case indicates that Judge Haines did not believe the family members were credible witnesses and also that he perhaps gave too much weight to the amount of investment activity that gives substance to the FLP. This taxpayer loss in Tax Court is softened by the more reasonable approach taken in the Miller case, the latest in the now long line of judicial decisions on FLP/FLLC viability for estate tax purposes.

The Miller Case Once again, an FLP was involved here, in which two separate sets of marketable securities contributions by the decedent to the FLP took place—one around the time of FLP formation in 2002 and the other in 2003 shortly prior to decedent’s death.

Tax Court Judge Goeke, in considering the “bona fi de sale” excep-tion to Section 2036(a), approved the partnership plan as having nontax signifi cance and stated: “MFLP’s activities need not rise to the level of a ‘business’ under the Federal income tax laws in order for the exception under section 2036(a) to apply.”

The court found the testifying family members at trial to be cred-ible—especially Virgil G. Miller, the eldest son who managed

the FLP’s securities (about 40 hours per week!). The “driving force” in 2002 behind the formation and funding of the FLP was to continue the long-standing “charting stocks” methodology of the predeceased husband, who died in 2002.

IRS did not challenge the claimed 35 percent valuation discount for the FLP entity interests, both for initial 2002 gift tax purposes (8 percent equity transferred 2 percent to each of four children) and estate tax purposes. However, after decedent broke her hip and rapidly appeared to develop other health problems, the rush of the family in May of 2003 to transfer all of decedent’s remaining securities to the FLP was suspect. Here the court stated the “driving force” of this transfer was to reduce the taxable estate of decedent. Therefore, no discount was allowed.

There was another issue in the Miller case, namely, whether a marital deduction trust established by the predeceased husband must be included in the surviving spouse’s estate even when she received no income distributions during her remaining lifetime, presumably not needing the income. Citing the Soberdash case 4 and discussing the scope and requirements of the QTIP (qualifying terminable interest property) trust election, the court made clear that the right to income was what was important, not whether it was taken or needed by the surviving spouse. Therefore, the court included the value of the QTIP trust in the surviving spouse’s estate at her date of death.

What Is the Future of FLP/FLLC Planning? Tax practitioners and business valuation appraisers ask this question all the time. The answers depend on:

1. Your evaluation of pass-through entity planning as a wealth preservation technique; and

2. Your guess as to the future of the estate tax law (generally) and Treasury efforts to reign in valuation discounts (specifi cally).

The author’s article in the last issue of Business Valuation Alert provided some insights into viable planning, but also cautioned readers to follow legislative developments carefully, especially in light of the present bill in Congress for valuation discounts to be restricted severely. 5

Those interested in the valuation process and in using valuation principles to benefi t families should review all the alternatives available in estate planning. Certainly, planning with active business entities offers many opportunities, including those relating to valuation.

Differentiating between compensation entitlements and busi-ness equity interests can “divide” business value. The use of co-tenancy valuation discounts, long accepted by the courts, can be useful where real estate is involved. However, where passive assets are to be held by an entity and gifts or sales made within the family, this author suggests a cautious, well-

Estate Tax CasesCONTINUED FROM PAGE 7

9

JULY 2009

ASB Adopts New Disclosure Requirements for 2010–2011 Edition of USPAP At its public meeting in New Orleans, The Appraisal Foun-dation’s Appraisal Standards Board (ASB) adopted revisions for the next edition of the Uniform Standards of Professional Appraisal Practice (USPAP). The revised edition of USPAP will be in effect for two years, starting January 1, 2010 and ending December 31, 2011.

While the 2010-2011 edition of USPAP is scheduled to be avail-able on October 1, 2009, the ASB is recommending that appraisers and their clients familiarize with the upcoming changes as soon as possible. To facilitate this early education, the ASB has released Summary of Actions Related to Proposed Changes, a document that outlines and explains the upcoming changes to USPAP.

ASB Highlights Two Changes The ASB is highlighting two of the most significant chang-es to USPAP. One of these two changes is the elimination of the requirement for appraisers to allow clients access to work files when preparing a Restricted Use Appraisal Report. The ASB decided that this Ethics rule statement is unnecessary because of the existing requirement that all appraisal reports contain sufficient information to en-able the intended users of the appraisal to understand the report properly.

The second change the ASB anticipates will be more controversial. Under the 2010-2011 edition of USPAP, in the Conduct section of the Ethics Rule, appraisers will be obligated to notify clients of any involvement with the subject property within the prior three years. The obligation covers services in regards to property as an appraiser or in any other capacity, such as property management, leasing, brokerage, auction, or investment advisory services .

Appraisers must provide this disclosure up front, prior to ac-cepting an assignment. If the prior involvement is not discov-

ered prior to accepting an assignment, disclosure must be made whenever the prior relationship is discovered. The disclosure requirement applies to report certifi cation.

New Disclosure Requirement Necessary for Preserving Public Trust “We understand this new obligation may be unpopular with some appraisers,” says Sandra Guilfoil, Chair of the ASB. She adds that the ASB is doing its best to provide guidance regarding the new requirement which the ASB believes to be necessary for securing public trust in the appraisal profession.

In a current climate with a focus on things like transparency in fi nancial transactions,” says Guilfoil, “the ASB did not believe that USPAP was adequately serving public trust by allowing an appraiser to complete an assignment without initially notifying the client of any recent involvement with the property,”

In addition to the Summary of Actions Related to Proposed Changes document, the ASB released a series of Q&As on the topic for additional guidance. The Q&A clarifi es confi dential-ity issues and other concerns. “We encourage appraisers and users of appraisal services to read through the Summary of Actions now, and thoroughly familiarize themselves with the requirements well in advance of the January 1, 2010 effective date,” says Guilfoil.

The Summary of Actions Related to Proposed Changes (April 3, 2009) can be accessed at The Appraisal Foundation’s Web site: www.appraisalfoundation.org/Summary_of_Actions_2010-11_USPAP. The USPAP Q&A (Vol. 11, No. 4, April 2009) on the new disclosure requirement is available here: www.appraisalfoundation.org/s_appraisal/bin.asp?SID=1&DID=1351&CID=12&VID=2&DOC=File.PDF. ◆

documented approach, taking into account these two recent cases as well as the “factors for success” presented in the previous article. FLP/FLLC planning most likely will remain viable, but perhaps at greater risk and cost.

Owen G. Fiore, JD, FioreWealthPlanningConsulting, is a past contributor of BV Alert. His non-lawyer consulting practice regularly involves valuation issues and the use of entities and techniques to preserve wealth. For more information (as well as to obtain copies of regular newsletters on these and other topics), go to Owen’s Web site at www.owenfi ore.com. ◆

End Notes 1 Jorgensen v. Comm’r , T.C. Memo. 2009-66 (3/26/09). 2 Miller v. Comm’r , T.C. 2008-128 (5/27/09). 3 Estate of Bongard v. Comm’r , 124 TC 95 (2005); see also, Estates of

Stone , T.C. Memo. 2003-309. 4 Estate of Soberdash v. Comm’r , T.C. Memo. 1997-362. 5 5 H.R. 436, the “Pomeroy Bill,” introduced January, 2009. Section

4 thereof proposes substantial restrictions on passive investment en-tity valuation discounts and also restrictions on minority discounts where a family (with broadly determined attribution of ownership) has control of the entity.


JULY 2009

Impairment TestingCONTINUED FROM PAGE 1

of the reporting unit would be compared to the adjusted carrying value of the reporting unit.

Essentially, the impairment amount cascades sequentially through various individual and groups of assets before it fi nally results in the quantifi cation of the goodwill impairment.

Impairment Testing of Indefi nite-Lived Assets Indefi nite-lived assets consist largely of trademarks, brands, and other similar intangible assets whose life is deemed to be uninhibited by legal, regulatory, contractual, competitive, economic or other factors.

The testing of indefi nite-lived assets is the simplest and most straight-forward of the various asset impairment tests, and is covered in SFAS No. 142. The test involves comparing the fair value of the asset with its carrying value. If the fair value is less than the carrying value, the asset is impaired by the difference.

Testing Criteria Indefinite-lived assets are tested for impairment annually or more frequently due to an event. SFAS No. 142 refers to SFAS No. 144 for examples of events or changes in circumstances that may cause companies to consider in-terim impairment testing. The listing is provided below and is considered illustrative, though not exhaustive or comprehensive:

a. A signifi cant decrease in the market price of the asset. b. A signifi cant adverse change in the extent or manner in

which the asset is being used or in its physical condition. c. A signifi cant adverse change in legal factors or in the busi-

ness climate that could affect the value of an asset, including an adverse action or assessment by a regulator.

d. An accumulation of costs signifi cantly in excess of the amount originally expected for the acquisition or construc-tion of an asset.

e. A current-period operating or cash fl ow loss combined with a history of operating or cash fl ow losses or a projection or forecast that demonstrates continuing losses associated with the use of the asset.

f. A current expectation that, more likely than not, the asset will be sold or otherwise disposed of signifi cantly before the end of its previously estimated useful life.

Indefi nite-lived assets are generally tested individually for impairment. However, while rate EITF 02-7 does allow for indefi nite-lived assets which meet certain criteria to be

grouped, the following excerpt from EITF 02-7 outlines when to test indefi nite-lived assets individually and when to test them as a group:

A. Indicators that two or more indefi nite-lived intangible as-sets should be combined as a single unit of accounting for impairment testing purposes: ■ The intangible assets were purchased in order to construct

or enhance a single asset (i.e., they will be used together). ■ Had the intangible assets been acquired in the same ac-

quisition they would have been recorded as one asset. ■ The intangible assets as a group represent the highest and

best use of the assets (e.g., they yield the highest price if sold as a group). This may be indicated if (a) it is unlikely that a substantial portion of the assets would be sold separately or (b) the sale of a substantial portion of the intangible assets individually would result in a signifi cant reduction in the fair value of the remaining assets as a group.

■ The marketing or branding strategy provides evidence that the intangible assets are complementary, as that term is used in paragraph A16 of Statement 141.

B. Indicators that two or more indefi nite-lived intangible assets should not be combined as a single unit of accounting for impairment testing purposes: ■ Each intangible asset generates cash fl ows independent of any

other intangible asset (as would be the case for an intangible asset licensed to another entity for its exclusive use).

■ If sold, each intangible asset would likely be sold sepa-rately. A past practice of selling similar assets separately is evidence indicating that combining assets as a single unit of accounting may not be appropriate.

■ The entity has adopted or is considering a plan to dispose of one or more intangible assets separately.

■ The intangible assets are used exclusively by different Statement 144 asset groups.

■ The economic or other factors that might limit the useful economic life of one of the intangible assets would not similarly limit the useful economic lives of other intan-gible assets combined in the unit of accounting.

Impairment Testing of Long-Lived Assets

Long-lived assets consist largely of PP&E, customer relationships, technology, trademarks, and other similar intangible assets.

Impairment testing of long-lived assets is a multi step process:

■ Step 1 is a recoverability test that is based on a comparison of company specifi c projections of undiscounted cash fl ows with the carrying value of the assets;

■ Step 2 is a comparison of the fair value of the assets with their carrying value; and,

■ Step 3 is a calculation of individual asset impairment.

11

JULY 2009

ASSETGROUP

PP & E TRADEMARKGOODWILL

(if asset group=

reporting group)

TECHNOLOGYCUSTOMERRELATIONSHIPS

Figure 1

ASSETGROUP

ASSETGROUP 1

ASSETGROUP 2

ASSETGROUP 3

REPORTINGUNIT 1 REPORTING UNIT 2

COMPANY

Figure 2


Testing Criteria Long-lived assets are tested only when events or changes in circumstances occur and potentially cause them to be impaired. A listing of events or changes in circumstances provided in SFAS No. 144 is provided below. This list is illustrative, though not comprehensive:

a. A signifi cant decrease in the market price of a long-lived asset (asset group).

b. A significant adverse change in the extent or manner in which a long-lived asset (as-set group) is being used or in its physical condition.

c. A signifi cant adverse change in legal factors or in the busi-ness climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator.

d. An accumulation of costs signifi cantly in excess of the amount originally expected for the acquisition or construc-tion of a long-lived asset (asset group).

e. A current-period operating or cash fl ow loss combined with a history of operating or cash fl ow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).

f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of signifi cantly before the end of its previously estimated useful life.

Over the past six to nine months, many companies have expe-rienced a triggering event, resulting in an increase in the need for impairment testing of long-lived assets.

Testing Methodology The structure of the testing of long-lived assets is a controver-sial issue—many valuers believe (View 1) that assets are ag-gregated (regardless of whether they are tangible or intangible assets) and tested at the lowest level for which identifi able cash fl ows are largely independent of the cash fl ows of other groups of assets and liabilities.

While others believe (View 2) that the FASB only meant for PP&E assets to be grouped while intangible assets should be tested indi-vidually, as cash fl ows relating to intangible assets can be identi-fi ed (similar to the approach used in a purchase price allocation) and therefore represent the lowest levels of cash fl ows.

Our interpretation of the guidance is consistent with the former and, as such, it is our belief that assets should be grouped at the lowest level of independent cash fl ows and that the asset group can include both tangible and intangible assets.

Impairment testing of long-lived assets is a multi step process. Paragraph 7 of SFAS No. 144 describes impairment as follows:

For purposes of this Statement, impairment is the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash fl ows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverabil-ity, whether in use (paragraph 19) or under development (paragraph 20). An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.

Step 1: Testing the Assets for Recoverability

In Step 1, the assets are tested for recoverability. This involves comparing the undiscounted cash fl ows of the asset group with its carrying value. There are several key inputs in completing the undiscounted cash fl ow test:


JULY 2009

Reporting Unit UndiscountedCash flow

Carrying Value

Conclusion

Asset Group 1 $60 $50 No impairment

Asset Group 2 $70 $130 Impairment indicated, proceed to fair value test

Asset Group 3 $30 $60 Impairment indicated, proceed to fair value test

Total $160 $240

Goodwill $160 Unallocated as the asset groups are components of the reporting unit

Table 1

■ The projected cash fl ows include all expected cash infl ows and outfl ows that are directly related to the asset group and which are expected to arise as a direct result of the use and eventual disposition of the assets.

■ Cash fl ow projections, including the recovery of assets at the end of the projection period. This typically includes working capital and PP&E but may also include recovery of intangible assets.

■ Cash fl ows are projected over the remaining useful life of the primary depreciated or amortized asset. This is typically the most important asset of the business. In certain situations where the most important asset is not being depreciated or amortized, the next most important asset is utilized.

■ A fairly common adjustment to the company’s base cash fl ow projections is related to R&D expenses. R&D expenses are typically related to future product generations and, as such, are not directly associated with the use and disposition of the asset group.

■ The carrying value of the assets can include or exclude goodwill. If a reporting unit only has one asset group (see reporting unit 1 in Figure 2), goodwill is included in the asset group. If on the other hand, a reporting unit (see reporting unit 2 in Figure 2) consists of multiple asset groups, goodwill is not included in the carrying value of the asset groups.

Table 1 summarizes the recoverability test on the various asset groups of Reporting Unit 2.

Step 2: Determining the Fair Value of the Asset/Asset Group

If, in Step 1, it is determined that the carrying value of the as-set/asset group is not recoverable, the next step is to calculate the fair value.

The fair value is determined consistent with SFAS No. 157, and as such, the asset group value may be higher than the

undiscounted cash fl ows. For instance, in determining the fair value there is no cap on the life of the asset/asset group. Rather, the life is based on the market participant’s assump-tions about the asset/asset group’s life. In many cases, the asset group is a business, and thus, the cash fl ows extend out into perpetuity.

Calculating the fair value of the asset/asset group can be more straightforward than calculating the undiscounted cash fl ows. In many cases, the assumptions used to determine the fair value are more objective and easier to determine. For instance, in Step 1 certain costs, such as R&D expense, may need to be excluded as they relate to future products other than assets be-ing tested for impairment. A second area of uncertainty relates to determining the value and, therefore, the cash fl ow related to a non-core intangible (such as a trademark or customer relationships) at the end of the remaining useful life of the primary asset/asset group.

If the fair value is below the carrying value of the asset/asset group the impairment is then allocated to the individual assets in the next step.

Step 3: Determining the Impairment of Individual Assets

If, in Step 1, the asset/asset group is determined to be not recoverable (CV>undiscounted cash fl ows) and in Step 2 the asset group is impaired (CV>FV), then the impairment amount needs to be allocated to the individual assets of the asset group. This process is iterative, as the minimum value for any asset is its fair value. The impairment indicated can be less than the difference between the fair value and the carrying value of the assets.

In this situation, the assets will only be written down on a pro-rata basis to the level of impairment indicated by the fair value of the group. The fair value of any individual asset is its fl oor value.

In other situations, the impairment indicated is greater than the difference between the fair value and the carrying value.

This excess (or incremental impairment amount) could potentially result in goodwill impairment. Table 2 pro-vides an example of this calculation.

The fair value of the asset group is $50, while the car-rying value is $60. Allocating on a pro-rata basis results in an impairment of fi xed assets by an amount greater than the fair value of the fi xed assets allow. Thus, the impairment is re-allocated to other assets.

Goodwill Impairment Testing

Goodwill impairment testing is a two-step test at the reporting unit level and is performed after testing of all other assets is complete. The fair value of the reporting


13

JULY 2009

Asset Group 3

BookValue

% of Total

FairValue

Pro –Rata Allocation

Allocationofimpairment

Adjusted Book Value

WorkingCapital

$10 n/a 0 0 $10

Fixed Assets 20 40% 18 4 2 18

Customer relationships

10 20% 12 2 0 10

Technology 20 40% 7 4 8 12

Total 60 10 10 50

Table 2unit is calculated and compared to the carrying value to determine if impairment exists. If the fair value is less than the carrying value, further calculations are required in order to determine the fair value of goodwill.

The level of testing for goodwill impair-ment is somewhat controversial. Some valuers (View 1) believe that Step 1 of goodwill impairment testing should be completed at a total asset or enterprise value level, while others (View 2) believe that Step 1 of goodwill impairment testing should be completed at the equity level.

While there are a number of arguments on either side, it is our belief that the enterprise value level is most appropriate because it is more objective in determining whether or not asset impairment is indicated. Testing at the equity level may be skewed by negative equity or by complications in the determination of the value of equity after consideration of the fair value of debt without reflection of the ability to adhere to specific payment terms.

Testing Criteria SFAS No. 142 requires companies to test for impairment an-nually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The indicators noted are as follows:

a. A signifi cant adverse change in legal factors or in the busi-ness climate.

b. An adverse action or assessment by a regulator. c. Unanticipated competition. d. A loss of key personnel. e. A more-likely-than-not expectation that a reporting unit

or a signifi cant portion of a reporting unit will be sold or otherwise disposed of.

f. The testing for recoverability under Statement 144 of a signifi cant asset group within a reporting unit.

g. Recognition of a goodwill impairment loss in the fi nancial state-ments of a subsidiary that is a component of a reporting unit.

Testing Methodology Step 1: Identifying Potential Impairment

The excerpt below from paragraph 19 of SFAS No. 142 high-lights the Step 1 test:

19. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount,

including goodwill.....If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impair-ment test shall be performed to measure the amount of impairment loss, if any.

The fair value is determined consistent with SFAS No. 157. In addition, the value of the reporting unit should consider (as per EITF 02-13) whether the reporting unit would be sold in a taxable or non-taxable transaction.

This calculation is fairly complex and will likely require assistance from the company’s tax department in order to determine if any incremental value would arise from structuring the sale of the reporting unit in a taxable or non-taxable transaction. There is a debate whether this is within the scope of services provided by the valuation professional.

In the current economic environment, the equity of many companies is trading at values below their carrying values (i.e., their market capitalization is below the carrying value of their book equity). While this is not an absolute indication that goodwill impairment exists, it is a signifi cant identifi er that goodwill impairment may exist whether the test is com-pleted at the equity or enterprise value level. As part of this issue, companies, valuers, and auditors have seen a renewed discussion of control premiums. For example:

■ Does the market capitalization refl ect the fair value of a company?

■ What if the company consists of multiple reporting units? ■ Does the market value of a company’s equity refl ect the

fair value of debt or the obligation related to debt from the perspective of equity holders?



JULY 2009

Asset Type Indefinite-lived Intangible Assets

Long-lived Tangible & Intangible Assets

Goodwill

Accounting Guidance

SFAS 142 SFAS 144 SFAS 142

Focus Indefinite-lived Intangible assets carried at lower of FV or CV

Test the recoverability of finite-lived assets

Goodwill carried at lower of FV or CV

Methodology One step Multiple steps Two step

Frequency Annually/event based Event based Annually/event based

Table 3

These are all questions that need to be addressed in arriving at a fair value conclusion for the reporting unit(s) being tested for impairment. Many times these questions are answered through additional calculations such as the comparison of reporting units’ values to market-based values, including the review of current and historical control premiums in order to determine reasonableness.

Step 2: Determining the Fair Value of Goodwill

The excerpt below from paragraph 20 and 21 of SFAS No. 142 highlights the Step 2 test:

20. The second step of the goodwill impairment test, used to measure the amount of impairment loss, com-pares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the car-rying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.

21. The implied fair value of goodwill shall be deter-mined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, an entity shall allocate the fair value of a re-porting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit.14.

The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

The fair value of assets and liabilities are calculated in a manner consistent with SFAS No. 157. In addition, EITF 02-13 also needs to be considered, as the fair value of goodwill should reflect any adjustment of deferred tax (assets or liabilities) in determining the fair value of goodwill. Similar to other assets and liabilities whose fair values are being determined, revised estimates of deferred taxes are calculated only for the purpose of determining goodwill impairment.

Summary of Impairment Tests

SFAS Nos. 142 and 144 together provide a comprehensive framework for testing the various long-lived and indefi nite lived assets for impairment. Table 3 provides a summary of each asset type, applicable accounting standard, frequency of testing and other pertinent information.

In addition to the primary guidance documents noted above, there are other factors such as SFAS No. 157, EITF 02-7, EITF 02-13, auditor guidance/ perspective and the SEC’s perspective that need to be considered in completing the impairment tests.

The current financial and economic environment contin-ues to have a significant impact on companies and their financial statements. Many companies have taken sizeable impairments of goodwill, intangible assets and PP&E and will continue to review company assets, on a quarterly basis, with numerous levels of management coupled with various advisors.

PJ Patel, CFA, ASA, is Senior Vice President and Partner at Valuation Research Corporation (VRC). He leads VRC’s fi nancial reporting related valuations practice and speaks regularly on financial reporting related valuation issues. He is an active member of the AITF and is cur-rently on the Appraisal Founda-tions working group developing best practices for valuing cus-tomer relationships. For more information (including archived webcasts) please visit www.valu-ationresearch.com. ◆


15

JULY 2009

Ca

len

da

r AUGUST ASA. The American Society of Appraisers is offering the courses The Market Approach and Valuation of Intangible Assets for Financial Reporting Purposes from August 13–16 at the Double Tree Hotel and Conference Center, Chicago North Shore, Skokie, IL. Contact: American Soci-ety of Appraisers Headquarters, 555 Herndon Pkwy, Suite 125, Herndon, VA 20170; call (800) ASA-VALU.

www.appraisers.org

NACVA. The National Association of Certifi ed Valuation Analysts is offering a Business Valuation and Certifi cation Training Center on August 10–15 in Philadelphia, PA and on August 17–22 in Milwaukee, WI. Contact: NACVA, 1111 Brickyard Road, Suite 200, Salt Lake City, UT 84106-5401; call 800-677-2009 or 801-486-0600; or fax 801-486-7500.

www.nacva.com

AICPA. The American Institute of Certifi ed Public Ac-countants is offering the AICPA National Business Valu-ation School on August 17–21, Lewisville, TX. Contact: AICPA Member Service Center, Conferences, 220 Leigh Farm Road, Durham, NC 27707-8110; call 888-777-7077; or fax 800-870-6611.

www.cpa2biz.com/conferences

SEPTEMBER ASA. The American Society of Appraisers is offering the courses Introduction to Business Valuation and Business Valuation Case Study from September 10–13 at the Loews Annapolis Hotel, Annapolis, MD. Contact: American Soci-ety of Appraisers Headquarters, 555 Herndon Pkwy, Suite 125, Herndon, VA 20170; call (800) ASA-VALU.

www.appraisers.org

AICPA. The American Institute of Certifi ed Public Ac-countants is offering the AICPA National Forensic Account-ing Conference on September 23–25, San Francisco, CA. Contact: AICPA Member Service Center, Conferences, 220 Leigh Farm Road, Durham, NC 27707-8110; call 888-777-7077; or fax 800-870-6611.

www.cpa2biz.com/conferences

NACVA. The National Association of Certifi ed Valuation Analysts is offering a Business Valuation and Certifi cation Training Center on September 14–19 in San Francisco, CA and on September 21–26 in Chicago, IL. Contact: NACVA, 1111 Brickyard Road, Suite 200, Salt Lake City, UT 84106-5401; call 800-677-2009 or 801-486-0600; or fax 801-486-7500.

www.nacva.com

IBA. The Institute of Business Appraisers is offering the courses Essentials of Business Appraisal on Sep-tember 21–25, Business Appraisal Review Accreditation Workshop on September 22–26, Report Writing, Review & Analysis on September 23–24, and Preparation for the CBA Written Exam on September 26, at the Palmer House Hilton Hotel, Chicago, IL. Contact: IBA, P.O. Box 17410, Plantation, FL 33318; call 954-584-1144; or fax 954-584-1184.

www.go-iba.org

OCTOBER ASA. The American Society of Appraisers is offering the courses CAVSMC—Monte Carlo Simulation: Extensions in Valuation Part I on October 17, CAVSRO Real Options Valuation: Extensions in Value Part II on October 18, CAVS123R—CAVS123R/409A on October 21-22, and CAVSCC—Cost of Capital on October 21–22, at the Boston Marriott Copley Place, Boston, MA. The ASA is also offering the courses The Income Approach and Introduction to Business Valuation from October 1–4 at the Manhattan Beach Marriot, Manhattan Beach, CA. Contact: American Society of Appraisers Headquarters, 555 Herndon Pkwy, Suite 125, Herndon, VA 20170; call (800) ASA-VALU.

www.appraisers.org

NACVA. The National Association of Certifi ed Valuation Analysts is offering a Business Valuation and Certifi cation Training Center on October 26–31 in New Orleans, LA. Contact: NACVA, 1111 Brickyard Road, Suite 200, Salt Lake City, UT 84106-5401; call 800-677-2009 or 801-486-0600; or fax 801-486-7500.

www.nacva.com


JULY 2009

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