A new year brings new opportunities and challenges in the world of fair value accounting. The Wall Street Journal’s recent coverage of the potential changes coming to goodwill impairment testing and the increased scrutiny around private equity portfolio company valuations signals that fair value issues continue to be top of mind for investors, companies, and regulators. Here are four key areas worth watching in 2020.
Goodwill Impairment Testing
The FASB convened a roundtable in late 2019 to hear comments from registrants, investors, and the practitioner community about whether to continue the current system of annual goodwill impairment tests or shift to an amortization model over a set period of time. The responses have been mixed thus far, with some advocating instead for a trigger-based approach, perhaps over an initial period of time following an acquisition. The FASB has indicated that it will continue to discuss the comments during 2020 and no timeline for any changes has been set.
Read our latest thoughts on technical issues surrounding goodwill impairment testing. >>Click Here
Portfolio Valuation
The AICPA issued final guidance in 2019 for the valuation of portfolio company investments held by venture capital and private equity funds and other investment companies. The new accounting and valuation guidance lays out best practices for preparers, independent auditors, and valuation specialists, and we anticipate that firms and their stakeholders will increasingly expect that their fair value measurements will be done in compliance with the guide.
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Business Combinations
Another robust year for M&A transactions in 2019 meant an increased need for purchase price allocations and contingent consideration valuations. What may have been overlooked is that The Appraisal Foundation has now issued final guidance on the valuation of contingent consideration (earn-outs). One message from the new guidance: scenario-based methods are now being discouraged in favor of more complex, alternative approaches.
Equity-Based Compensation
The increased scrutiny on PE/VC portfolio company investments inevitably spills over into the realm of valuing private company shares for equity-based compensation purposes. Indeed, the AICPA is in the process of drafting an update to its 2013 accounting and valuation guide on the topic. Another trend we’ve noticed is the increasing prevalence of equity grants with market condition vesting (such as performance of the issuer’s stock relative to a benchmark index) and issuances of incentive units / profit interests. These frequently require specialized fair value measurements.
Mercer Capital provides a full range of fair value measurement services and opinions that satisfy the scrutiny of auditors, the SEC, and other regulatory bodies. We have broad experience with fair value issues related to public and private companies, financial institutions, private equity firms, start-ups, and other closely held businesses. We also offer corporate finance consulting, financial due diligence, and quality of earnings analyses. National audit firms regularly refer financial reporting valuation assignments to Mercer Capital.
