Top 10 Questions of CFOs & Controllers Regarding Their ASC 805 Fair Value Measurements

1. Does my company’s acquisition in fact require accounting under ASC 805?

The Financial Accounting Standards Board in January 2017 issued Accounting Standards Update 2017-01 (“ASU 2017-01”) clarifying the definition of a business (only acquisitions of a business require accounting under ASC 805).  The intent of the clarification in this ASU is to narrow the number of acquisitions that require accounting for as an acquisition of a business. Click here if you would like to read the full text of ASU 2017-01.

2. How long do I have to make my ASC 805 fair value measurements?

The maximum is one year from the transaction date, but technically the measurement is due when the necessary information has been obtained (or it has been determined that necessary information is not available).

3. When should I engage a valuation specialist to assist me in my ASC 805 fair value measurements?

It is typical to wait until the transaction closes, however, engaging a valuation specialist prior to transaction close can be helpful in situations where: 
1) the self-imposed measurement period window is short (e.g., due date on audited financial statements for bank covenant purposes is shortly after transaction date),
2) the fair value measurements are incorporated into your due diligence of the potential transaction, thereby adding more insight on the target.

4. How do I select a valuation specialist?

There are many views on this, but common considerations include: 
1) qualifications of the specialist, including relevant experience and certifications (e.g., ASA, CPA/ABV, CFA)
2) experience of your auditor with the specialist,
3) cost/benefit analysis and
4) basis for arrangement – relationship or transaction driven.

More thoughtful consumers of valuation services also consider:  
1) alignment of your values with the values of the specialist,
2) experience of the overall team of specialists on similar engagements, and
3) the ability of the team to work efficiently within your time constraints.

5. What do I need to know about valuation?

First and foremost, be aware that the conclusion of value expressed by your specialist is an estimate, and is only as good as the underlying assumptions and inputs used.  Some of the underlying assumptions and inputs are business-driven, some are technical-finance driven, and still others are somewhere in-between, such as inputs from market data.  You and your team are in the best position to ensure the business-driven assumptions and inputs in the valuation are sound.  For the technical-finance driven inputs and assumptions, review your specialist’s reasoning as best you can.  For the in-between assumptions and inputs, contribute to the creation of those assumptions and inputs, and/or review such items thoroughly.

6. I am electing private company GAAP election of ASC 805, do I still need to hire a third-party valuation specialist, or can I do internally?

While the private company reporting option of ASC 805 reduces the scope of work for your ASC 805 fair value measurements by avoiding the valuation of certain intangible assets such as customer relationships and non-competes, the valuation of other intangible assets such as trade names and patents, respectively, is still required, as well as valuations of the real and personal property. The valuation of intangible assets is inherently more difficult to value relative to a valuation of a business, due to a number of factors and considerations, including a lack of market data on sufficiently comparable assets as well as the ability to assess the risk profile of the subject asset vis-à-vis the risk profile of the subject company.

7. What is often over-looked in ASC 805 fair value measurements?

Contingent consideration/earnouts require measurement at fair value, not stated value.  Also, in acquisitions where the target will be incorporated into more than one reporting unit, the impact on the ASC 805 fair value measurements is also often overlooked.

8. What do I do if my fair value measurements change?

You need to determine if the change is a measurement period adjustment, or is a correction of an error.  To determine if the change is eligible for a measurement period adjustment, the original fair value measurement should have been disclosed as incomplete or provisional in nature.  Assuming so, the Codification in paragraphs under ASC 805-10-30 require that “…all pertinent factors…” should be considered, including “…the time at which additional information is obtained and whether the acquirer can identify a reason for a change to a provisional amount.”

9. I have determined the change to my fair value measurement is a measurement period adjustment, now what?

ASU 2015-16 issued in September 2015 simplifies the reporting of such a change by no longer requiring the recasting of previously reported results, and thus the change is reported prospectively. Click here if you would like to read the full text of ASU 2015-16.

10. I have determined the change to my fair value measurement is a correction of an error, now what?

ASU 2015-16 does not change the accounting for the correction of errors, thus continue to follow the guidance of ASC Topic 250, Accounting Changes and Error Corrections.