Financial Reporting – Why You Should Hire a 3rd Party Specialist

Is your company planning an upcoming acquisition? Read on how Adamy can help.

The Financial Audit Process

A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. Although not legally required, many private companies have an annual financial audit for loan covenant compliance, creditor and investor relations, board of director mandates and other internal purposes. As a result, most companies in the United States do follow Generally Accepted Accounting Principles (GAAP). The objective of a financial audit is to ensure the financial statements are compliant with GAAP. GAAP refers to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB).

FASB Accounting Standards Codification (ASC) Overview

In any given fiscal year, a company may enter into certain financial transactions such as a merger or acquisition or a grant of equity awards, that result in specialized accounting measures. We will focus our attention on the following accounting guidance and techniques required to be GAAP compliant:

• FASB ASC Topic 820 – Fair Value Measurements (Overall)
• FASB ASC Topic 805 – Business Combinations (Merger / Acquisition)
• FASB ASC Topic 350 – Intangibles / Goodwill and Other (Goodwill Impairment)
• FASB ASC Topic 718 – Compensation / Stock Compensation (Equity Awards)

In a business combination, one entity acquires another entity and must report for said transaction under the acquisition method of accounting as outlined in ASC Topic 805. This is typically referred to as a purchase price allocation (PPA). PPAs are extensive, complex, and highly technical in nature. It requires significant professional experience and judgement to produce a PPA in compliance with ASC Topic 820 and 805. The following concepts and terms are just a few examples of basic knowledge needed to apply the acquisition method of accounting:

• Fair value
• Fair value hierarchy (Level 1, 2, 3)
• Highest and best use
• Market participant
• Principal or most advantageous market
• Orderly transaction

• Exit price
• Consideration Transferred
• Acquirer
• Business
• Identifiable intangible assets
• Goodwill
• Contingent Consideration

There are many other terms and concepts inherent in every PPA that must be recognized and implemented in accordance with the appropriate FASB guidance. To make matters more complicated, most acquisitions result in “goodwill” landing on the company’s opening balance sheet. Depending on the certain company GAAP and tax elections, the goodwill may or may not need to be tested annually for impairment as outlined in ASC Topic 350. Applying a goodwill impairment test (Step 1 or Step 2) also requires extensive knowledge of business valuation theory.

Lastly, a company may issue equity awards in the form of stock options, profit interests, warrants, restricted stock units, stock appreciation rights or other forms of equity securities and subsequently have the need to account for stock compensation expense as outlined in ASC Topic 718. Once again, determining the fair value certain equity awards and accounting for the associated stock compensation expense is complex and requires extensive knowledge and experience operating under the appropriate FASB guidelines. Some basic terms and techniques needed are as follows:

• Fair Value
• Volatility (Asset and Equity)
• Implied Volatility
• Beta (Levered and Unlevered)
• Minority Interest
• Size and Leverage Adjustments
• Breakpoints/Waterfall

• Black-Scholes Merton Method
• Option Pricing Method
• Backsolve Method
• Monte Carlo Simulation
• Hybrid Method
• Probability-Weighted Expected Outcome Method (PWERM)

We provide all this background with the intent to illustrate how comprehensive it is to perform certain financial reporting tasks and successfully make it through a rigorous financial audit.

Why You Should Hire Adamy

Here are some of the top reasons you should hire a reputable 3rd party business valuation specialist:

• Extensive knowledge of relevant FASB guidance which ensures compliance with GAAP
• Experience and know-how regarding complex financial modeling techniques that would be difficult to perform internally
• Creates a smooth and seamless audit experience for the most complicated accounting topics
• Allows management to focus on day-to-day operations while specialist handles the specific financial reporting matters creating internal efficiencies
• Knowledge and technical expertise to assist management in all audit support exercises such as responding to detailed and complex audit questions
• Access to costly subscription databases such as Standard and Poor’s Capital IQ, Business Valuation Resources (BVR), Kroll Cost of Capital Navigator, Economic Research Institute, IBIS World Industry Reports, GF Data, Risk Management Associate Studies (RMA), Crystal Ball and more

Adamy has the experience and team to assist you in completing your most challenging financial reporting matters. This will give management time to focus on what truly matters to you, your business. If you need assistance with determining fair value regarding a business combination, goodwill impairment or stock compensation expense, Adamy is here for you.