The Professionals Guide to Fair Value: The Future of Financial Reporting

Sign off on financial statements with confidence with the professional guidance found in The Professional′s Guide to Fair Value When considering a substantial business deal—whether a major expansion, significant acquisition, plant closure, or considerable divestiture—a go/no–go decision has to be made, based on a bottom line calculated from sometimes inadequate information. The key questions you need to answer are: how much value will be created, and for whom? Learn how to skillfully assess and report your answers with The Professional′s Guide to Fair Value. Based on the recent substantial changes to fair value rules as well as author James Catty′s fifty years in business valuations around the world, The Professional′s Guide to Fair Value provides the elements and basics of fair value, allowing you to grasp all the applicable elements and adhere to them as required. This comprehensive resource helps you understand the basics so that you may understand financial statements with certainty. Filled with sample financial statements, tables, recommended applicable techniques, and checklists, The Professional′s Guide to Fair Value reviews: The ten commandments of valuation The fair value concept Reporting and cash–generating units The six stages of fair value: a framework Projecting what is to come The market, cost, and income approaches to fair value Sources of value Valuing liabilities Mergers Don′t let uncertainty sabotage the value of your assets. The Professional′s Guide to Fair Value helps you achieve uniformity and consistency in valuation and financial reporting.

Preface xi Acknowledgments xv Chapter 1: Significance of Value 1 Business Uses for Valuation 2 Mergers and Acquisitions 2 Financial Reporting 3 Investment Bankers versus Valuators 8 Valuation Requirements 8 Litigation Risks 9 Ten Commandments of Valuation 10 Chapter 2: Fair Value Concept 13 Relevant Pronouncements 14 Definitions 14 Market Participants 15 Fair Value Accounting 16 Revaluation under IFRS 16 Other Types of Value 17 Valuation Principles 19 Reporting and Cash–Generating Units 20 Chapter 3: Fair Value Framework 21 Stage 1: Determine the Unit of Account 22 Stage 2: Evaluate the Premise of Value 24 Stage 3: Assess the Principal Market 29 Stage 4: Establish the Most Advantageous Market 30 Stage 5: Select Appropriate Valuation Methods 33 Stage 6: Estimate Fair Value Conclusions 37 Chapter 4: Taming the Future 41 Definitions 42 Effect of Market Participants’ Assumptions 43 Scenario Analysis 45 Scenario Implications 49 Chapter 5: Projecting What Is to Come 53 Base the Future on the Past 54 The Truth Is in the Parts 56 Avoid Unnecessary Risks 59 Garbage In, Garbage Out 63 Believable and Likely Conclusions 66 Quality of Earnings 67 Conclusion 68 Chapter 6: The Market Approach to Fair Value 69 Nature of Markets 70 Classifying Assets 72 Comparable Transactions 74 Guideline Entities 76 Guideline Entities Example 79 Licensed Asset Example 82 Conclusion 84 Chapter 7: The Cost Approach to Fair Value 85 Current Replacement Cost 85 Deductions 87 Integrating the Factors 90 Residual Value 92 Useful Lives 92 Valuing Intangible Assets by the Cost Approach 97 Conclusion 103 Chapter 8: The Income Approach to Fair Value 105 Capitalization Methods 106 Income Approach—Discounting 110 Terminal Amounts 115 Application to Intangible Assets 116 Chapter 9: Sources of Value—Profits 121 Structure of Businesses 121 Innovation 122 DuPont Analyses 129 Chapter 10: Sources of Value—Risks 135 Reducing Risks 136 Continual Monitoring and Testing 136 Dealing with Biases 138 Risk Rate Component Model 139 Intellectual Capital Value Drivers 146 Conclusion 147 Chapter 11: Valuing Liabilities 149 Liabilities Transferred Rather Than Settled 150 Asset Retirement Obligations 157 Contingent Liabilities 158 Chapter 12: Business Combinations 161 Do Mergers Pay Off? 162 Why Merge? 163 Determination of Synergies 166 Intrinsic and Investment Values 167 Quantification 167 Chapter 13: Purchase Price Allocation 173 Stage 1: Determine the Acquirer 174 Stage 2: Establish the Consideration’s Fair Value 176 Knowledge of the Industry 178 Stage 3: Identify All the Items Involved 180 Stage 4: Select Appropriate Valuation Techniques 188 Stage 5: Estimate Fair Values and Reconcile Rates of Return 190 Conclusion 192 Chapter 14: Impairment 193 Reporting Units 194 Cash–Generating Units 196 Goodwill 197 Allocations 198 GAAP Long–Lived Assets Impairment Test 198 IFRS Impairment Test 200 GAAP Goodwill Impairment Test 202 Chapter 15: The Auditor’s Blessing 207 Auditing Fair Values 208 Conclusion 220 About the Author 221 Index 223

James P. Catty has been engaged in business valuations around the world for more than fifty years and has undertaken speaking engagements in China, Germany, Romania, Taiwan, Turkey, the U.K., and the U.S. He is Chairman of the International Association of Consultants, Valuators and Analysts (IACVA); President of Corporate Valuation Services Limited (CVS), Toronto; and of counsel to Hanlin Moss, PS in Seattle, Washington, and Xi′an, China. Catty is the author of the Wiley Guide to Fair Value under IFRS.