SFAS 142 Valuation Case Study Draft SFAS 142 Valuation Case Study Prepared for the American Accounting Association August 3, 2008 Transaction Services

Agenda 1 Case Study Purpose 2 Case Background 3 Case Study Materials 6 Page 1 Case Study Purpose 2 Case Background 3 Case Study Materials 6 3.1 Valuation Report and Schedules 8 3.2 Valuation Review Program 12 3.3 Key Issues Identification Exercise 16 4 Questions? 20

Section 1 Case Study Purpose 1

Section 1 - Case Study Purpose Fair value measurements are an integral part of any impairment analysis This SFAS 142 case study simulates an audit review of a valuation analysis performed for purposes of goodwill impairment testing The case is designed to introduce students to the following key concepts and skill areas: Fundamental features of a typical valuation analysis and narrative report Areas of significance upon which an auditor of a valuation analysis should focus his/her review Identification of key value-driving assumptions within a valuation analysis and the means of verifying their accuracy Methods of gaining comfort with the final conclusions of a valuation analysis 2

Section 2 Case Background 3

MMN Builders’ Impairment Test Section 2 - Case Background MMN Builders’ Impairment Test MMN Builders, Inc. is a hypothetical, privately-held, homebuilder operating in the Northeast and Southwest regions of the United States As a result of the recent nationwide downturn in the housing market, the company has had to incur significant impairment charges in its home inventories under SFAS 144 These impairment charges constitute a “triggering event” for the testing of goodwill impairment under SFAS 142 The company has two reporting units (Northeast and Southwest) both of which will require impairment testing 4

MMN Builders’ Impairment Test (Continued) Section 2 - Case Background MMN Builders’ Impairment Test (Continued) MMN Builders has engaged Appraisal Professionals, LLC (a hypothetical valuation firm) to perform the valuation analysis underlying its SFAS 142 test 5

Section 3 Case Study Materials 6

Quantitative valuation schedules Section 3 - Case Study Materials Materials Outline Narrative report Quantitative valuation schedules Valuation review program (written exercise) Summary presentation instructions (oral exercise) Sample answer key 7

Valuation Report and Schedules Section 3.1 Valuation Report and Schedules 8

Valuation Analysis Contents Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents Subject Report Section Exhibit Number Company and Triggering Event Background Section 1 Industry Overview Section 2 Engagement Overview Section 3 Impairment Executive Summary Section 4 Exhibits I and II 9

Valuation Analysis Contents (Continued) Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents (Continued) Subject Report Section Exhibit Number SFAS 142 Step 1 Discounted Cash Flow Public Company Multiples Section 5 Exhibits III – VIII SFAS 142 Step 2 Northeast Reporting Unit Section 6 Exhibits IX - XIV Assumptions and Limiting Conditions Appendix 1 10

Valuation Analysis Contents (Continued) Section 3.1 - Valuation Report and Schedules Valuation Analysis Contents (Continued) Subject Report Section Accounting Guidance Appendix 2 Valuation Methodology Appendix 3 Certifications and Qualifications Appendix 4 11

Valuation Review Program Section 3.2 Valuation Review Program 12

Review Program Purpose Section 3.2 - Valuation Review Program Review Program Purpose Provides a structured approach to reviewing valuations for goodwill impairment purposes in accordance with SFAS 142 Contains leading questions and references to appropriate accounting guidance to assist students in their review Sections can be reviewed all at once or piecemeal 13

Review Program Content Section 3.2 - Valuation Review Program Review Program Content Valuation background Reason for impairment testing Identification of reporting units Assessing expertise of the appraiser SFAS 142 Step 1 – Valuation of reporting units Market Approach (public company multiples) Income Approach (discounted cash flow) Discount rate calculation (weighted average cost of capital) 14

Review Program Content (Continued) Section 3.2 - Valuation Review Program Review Program Content (Continued) SFAS 142 Step 2 – Valuation of intangible assets Customer relationships (excess earnings method) Trade name (relief from royalty method) Assembled work force (replacement cost method) 15

Key Issues Identification Exercise Section 3.3 Key Issues Identification Exercise 16

Purpose of the Exercise Section 3.3 - Key Issues Identification Exercise Purpose of the Exercise Use the insights gained from answering questions in the review program to identify the key valuation issues requiring further investigation Develop strategies for testing and analyzing key valuation assumptions Gain an understanding of the sensitivities of these valuation assumptions to the ultimate impairment conclusion 17

For each issue, students should show: Section 3.3 - Key Issues Identification Exercise Exercise Description Using responses to the review program questions as a guide, identify 5-8 key value-driving issues requiring further diligence Key issues should be those with the largest impact on the ultimate impairment conclusion For each issue, students should show: Why the issue is critical? How sensitive is the impairment conclusion to the issue? Suggested verification procedures Methods for reaching an ultimate conclusion on reasonableness 18

Answer key provides specific examples of key issues Section 3.3 - Key Issues Identification Exercise Potential Key Issues Answer key provides specific examples of key issues Projection assumptions Understanding previous impairment charges for SFAS 144 Trade name royalty rates Customer attrition assumptions Numerous other issues can be identified 19

Section 4 Questions? 20