FASB Provides Clarity on Accounting for Profits Interest Awards Under ASC 718

In March 2024, the Financial Accounting Standards Board (FASB) issued ASU 2024-01, which clarifies the accounting treatment of profits interest awards. This move aims to enhance the consistency and understanding of Generally Accepted Accounting Principles (GAAP) related to such awards. The ASU update helps entities ascertain whether certain awards need to be measured at fair value under ASC 718 or if they should be accounted for under other guidance. In this article, we summarize the new FASB guidance and discuss common methods for valuing profits interests under ASC 718.

The Noncompete Agreement Is Dead, Long Live the Noncompete Agreement

The FTC has updated its rulings concerning the enforceability of noncompete agreements while also making significant allowances for agreements arising from transactions. The elimination of noncompete agreements will shift some value from identifiable, amortizable assets to goodwill and may influence the attrition rates used to calculate the value of customer-related assets. The new ruling is expected to be met with substantial litigation before it becomes effective.

Pay Versus Performance: What’s New in Year 2?

The SEC’s Pay Versus Performance disclosure rules introduced significant new valuation requirements related to equity-based compensation paid to company executives. As the 2024 proxy season gets underway, what lessons have been learned and what guidance has the SEC provided to registrants? We discuss some of the SEC’s recent Compliance & Disclosure Interpretations and share some best practices as companies gear up for Year 2 of the new Pay Versus Performance framework.

Stock-Based Compensation in Volatile Markets

Over the past decade stock-based compensation (SBC) gained widespread popularity as a way to reward employees while conserving cash. In this article, we discuss how market volatility can affect employee, management, and investor perspectives on Stock Based Compensation.

Goodwill Impairments Are on the Rise. Surprised?

Preliminary results for 2023 show that the number of goodwill impairments is increasing for both large and middle-market public companies. Based on data through November, the number of impairments recorded by firms on the S&P 500 and Russell 2000 indices had already eclipsed 2021 and 2022 full-year figures. Interestingly, these trends materialized even as the indices themselves posted favorable total returns for the year of 25% and 14%, respectively. Public and private companies currently in the process of performing their annual/interim impairment tests should be on the alert if their peer group turns out to be the one recording impairment charges.

Letters From the SEC: Business Combinations Edition

The SEC’s comment letters on public company filings give insight into what factors should be considered when discussing business combinations. In this article we discuss and comment upon four examples covering customer relationships, tradenames, contingent consideration, and bargain purchases. understanding how the SEC approaches these issues in the past will better prepare companies and their advisors for the level of scrutiny that often accompanies the accounting for business combinations.

5 Things to Know About the SEC’s New Pay Versus Performance Rules

In August 2022, the SEC adopted final rules implementing the Pay Versus Performance Disclosure required by Section 953(a) of the Dodd-Frank Act. These rules go into effect for the 2023 proxy season and introduce significant new valuation requirements related to equity-based compensation paid to company executives. What does this mean, and how does it apply to you? What are the requirements, and why might there be significant valuation challenges involved? We discuss this and more in this article.

Insurance Valuation Services for Financial Sponsors

Mercer Capital has worked with financial sponsors in the insurance industry for years and we understand both the dynamics of the industry as well as the accounting and valuation issues that are likely to be encountered. In this article, we list the key areas in which Mercer Capital can help with investment and transaction activity in the insurance sector.

Goodwill Impairment Testing in Uncertain Times

Most financial professionals understand that goodwill impairment testing is typically performed annually, usually near the end of a Company’s fiscal year. In fact, many companies just completed an impairment test as of year-end 2019. But the unprecedented events precipitated by the COVID-19 pandemic now raise questions about whether an interim goodwill impairment test is warranted.

2020 Fair Value Update and Outlook

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.

Shelf Life of an Equity Compensation Valuation

Clients frequently want to know, “How long is an equity compensation valuation good for?” We get it. You want to provide employees, contractors, and other service providers who are compensated through company stock with current information about their interests, but the time and cost required to get a valuation must also be considered.

Simple vs. Complex Capital Structures

Executives expend a great deal of effort to determine the optimal way to finance the operations of their businesses.  This may involve bringing on outside investors, employing bank debt, or financing through cash flow. Once the money has hit the bank, they may wonder, what effect does the capitalization of my company have on the value of its equity?

Valuation Methods for Private Company Equity-Based Compensation

Equity-based compensation has been a key part of compensation plans for years.  When the equity compensation involves a publicly traded company, the current value of the stock is known and so the valuation of share-based payments is relatively straightforward.  However, for private companies, the valuation of the enterprise and associated share-based compensation can be quite complex. This article takes a closer look at the four most common methods used to value private company equity securities.

Industry Considerations for Step Zero: Qualitative Assessments

ASU 2011-08 set forth guidance for an optional qualitative assessment to be performed before the traditional quantitative two step goodwill impairment testing process.  This preliminary qualitative assessment is known as “Step Zero.”  The goal of Step Zero is to simplify and reduce costs of performing the traditional quantitative goodwill impairment test process.

Tax Reform and Impairment Testing

Earlier this year, we considered the impact of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on purchase price allocations.  In this article, we turn our focus to the impact of the TCJA on goodwill impairment testing.  Changes to the tax code will affect both the qualitative assessment (often referred to as Step Zero) and quantitative impairment test.

What is the Order of Testing for Impairment?

When testing the goodwill of a reporting unit for impairment, the order of operations matters. Because the units themselves may contain assets subject to impairment testing, it is important to first reflect accurate carrying values for those assets before testing the goodwill of the unit overall.

Tax Reform and Purchase Price Allocations

On December 22, 2017, President Trump signed The Tax Cuts and Jobs Act, which resulted in sweeping changes to the U.S. tax code.  The Act decreased the corporate tax rate to 21% from 35%, in addition to modifying specific provisions around interest, depreciation, carrybacks, and repatriation taxes.  The change in tax rate will have the biggest impact on purchase accounting.

What You Need to Know about Measuring the Fair Value of Contingent Consideration

Measuring the fair value of contingent consideration (commonly referred to as an “earnout”) for financial reporting is a complex process – based on a number of variable inputs, unique risk profiles, and potentially complicated payoff structures. Valuation professionals must be well versed in the concepts of fair value, probability, and risk. Here’s what you need to know about what goes into that fair value measurement before it lands on your desk.

Valuation Expertise: Necessary Chapter 11 Process Navigation

Managers of companies going through a Chapter 11 restructuring process need to juggle an extraordinary set of additional responsibilities, often requiring help from outside third party specialists to formulate a reorganization plan that facilitate a successful navigation through the bankruptcy court. This article provides expertise on the Chapter 11 reorganization process and emergence.