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

2. 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

3. Section 1
Case Study Purpose 1

4. 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

5. Section 2
Case Background 3

6. 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

7. 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

8. Section 3
Case Study Materials 6

9. 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

10. Valuation Report and Schedules
Section 3.1
Valuation Report and Schedules 8

11. Valuation Analysis Contents
Section 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

12. Valuation Analysis Contents (Continued)
Section 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

13. Valuation Analysis Contents (Continued)
Section 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

14. Valuation Review Program
Section 3.2
Valuation Review Program 12

15. Review Program Purpose
Section 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

16. Review Program Content
Section 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

17. Review Program Content (Continued)
Section 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

18. Key Issues Identification Exercise
Section 3.3
Key Issues Identification Exercise 16

19. Purpose of the Exercise
Section 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

20. For each issue, students should show:
Section 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

21. Answer key provides specific examples of key issues
Section 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

22. Section 4
Questions? 20