The fair value of a reporting unit is determined in accordance with guidance in paragraphs 22-24 of FASB ASC 350-20-35 and in FASB ASC 820. There is significant diversity in practice about the appropriate interest to be measured when comparing the carrying amount of reporting unit to its fair value under step one of goodwill impairment testing.
So, take note of this great post on the CPA Insider from the AICPA. In the article, Mark Zyla (Acuitas Inc.) points out that consistency is the most important principle in Step 2 valuation analyses (conducted only when the first analysis concludes that the business unit’s fair value is less than its book value).
Zyla’s point is that in most cases either of the following approaches work, as long as the analyst doesn’t change mid-stream:
- Many valuation specialists believe the appropriate interest to be measured is the invested capital of the reporting unit (equity plus interest bearing debt). The supporters of this approach argue that measuring invested capital eliminates any issues related to how debt is allocated to the reporting unit or how the entity actually financed it.
- Other valuation specialists take the position that the appropriate interest to be measured is the equity of the reporting unit. This belief is often based upon FASB ASC 350-35-22 and its reference to quoted market prices.
Join Zyla on February 24 for a special one-of-a-kind interactive web workshop, “Advanced Workshop on Option Pricing Modeling.” Over the course of his intensive four-hour workshop, Zyla will guide attendees through hands-on examples, case studies and tutorials to show the proper implement, utilization, and application of option pricing analysis. Participate from the convenience of your home or office with our BVR’s industry-leading interactive web service. Register by February 1 and receive a special early-bird discount.
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