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SFAS 142, Goodwill and Other Intangible Assets, represents a significant expansion of business valuation into the financial reporting framework. It will be implemented in conjunction with SFAS 141, Business Combinations. Because of SFAS 142, finance and accounting professionals in reporting companies, and non-reporting companies that adopt the standard, must understand many of the principles, methods, and techniques of business valuation.
Even for professionals with significant experience in business valuation and intangible asset valuation, valuing reporting units for compliance with the pronouncement is a new frontier. It is not enough for an expert to be skilled in valuation, although that is critical. Rather, it is important to understand the valuation implications of SFAS 141/142, and to recognize when valuation decisions and judgments are being made that may materially affect a reporting unit's reported financial performance. Appraisers, auditors, and management will have to develop a common understanding of the valuation implications of SFAS 142. Moreover, the SEC will be reviewing SFAS 142 compliance with respect to public disclosure. Further interpretation of SFAS 142 from a valuation perspective will undoubtedly be required as FASB provides additional guidance and as everyone involved gains experience in the application of the statement.
Brief Summary of SFAS 142
SFAS 141 and SFAS 142 are designed to improve reporting and disclosure with respect to goodwill and other acquired intangible assets. SFAS 141 eliminated the pooling of interests method as an accounting option for business combinations, while SFAS 142 modified the purchase method of accounting by eliminating the amortization of goodwill and substituting the impairment test.
The emphasis on asset valuation, as opposed to expense recognition, reflected FASB's growing emphasis on fair value measurements of assets and liabilities. As FASB noted, goodwill could be both replenished and increased; therefore, amortization of the goodwill asset does not necessarily reflect the economic change of an investment's value. A nonamortization approach resolves these inherent deficiencies. Instead of amortization, the new standard prescribes an impairment review to assess the fair value of goodwill and appropriately adjust the reported asset balance.
SFAS 142 is a one-way street. Assets deemed impaired must be written down to their fair values. There is no provision in SFAS 142 for a subsequent recovery of the impairment writedown under more favorable operating or market...