Valuations for Purchase Price Allocations and Goodwill Impairment

During the past ten years, Empire has been active in doing allocation work (APB 16) for transactions across a wide range of industries. In recent years we have teamed with various partners in the machinery & equipment and real estate fields to provide a single, coordinated source for asset allocation and goodwill impairment testing services, at an affordable cost. Empire, in conjunction with its partners, can now offer full capabilities for regional, national and international asset allocation services, when an independent opinion of value is needed.

Asset Allocation is the process of assigning fair values to all major assets and liabilities of an enterprise, either following a merger or acquisition (for the restated or opening balance sheet) or in the process of "impairment" testing. Included in these assets can be tangible (machinery and equipment, real property) and intangible assets (intellectual property, goodwill, other intangibles).

In June 2001, the Financial Accounting Standards Board (FASB) issued its final statement regarding the accounting for purchased assets (SFAS 141) and testing for goodwill impairment (SFAS 142). For all transactions closed after June 30, 2001, SFAS 141 eliminates pooling-of-interests in favor of the purchase accounting method. Under SFAS 141, acquired goodwill must be stated at its fair value and is to be identified separately from other identifiable intangible assets, the fair value of which is recognized and stated separately. Other identifiable intangible assets include assets of a contractual nature or assets that can be separated from the goodwill of a business, such as marketing-related, customer-related, or technology-based intangible assets.

SFAS 142 - Goodwill and Other Intangible Assets - requires that both upon the initial adoption of 142, and on an annual basis, all existing "reporting units" (as defined in the standards) with recorded intangible assets are required to perform a valuation test for possible impairment of those assets. If this test indicates possible impairment, then further analyses of the value of these assets are required, which typically involves an analysis similar to a purchase price allocation.

Purchase Price Allocation Services (SFAS 141 - Business Combinations)

Assigning fair values to the tangible and intangible assets and liabilities of a newly acquired business enterprise requires the skills of qualified valuation professionals. Empire, in conjunction with its partners, can offer such a complete, one stop, package. Each of our partners are experts in their field and can produce credible and defensible analyses, in a timely manner, and at an efficient cost.

Empire has performed this work for all of the large public accounting firms, and numerous regional accounting firms, as well as directly for our corporate clients. The principals of our team have performed over 350 business combination engagements over the past decade, valuing both domestic and international assets. Our valuations are performed by senior accredited valuation experts holding one or more of the following professional credentials: CFA, ASA, ABV, AM, CBA, and MAI. Our valuations have withstood scrutiny by the SEC, lending institutions, and the IRS. We provide truly independent, third party valuation opinions.

Goodwill Impairment Testing (SFAS 142 - Goodwill and Other Intangible Assets)

In June 2001, the FASB also issued its final statements regarding the testing for booked assets' continuing value over time (impairment testing). The new ruling -states that goodwill and other intangible assets with non-determinable lives are non-amortizable. SFAS 142 requires that both upon the initial adoption of the standard, and on an annual basis (if not more frequent), all existing reporting units with booked intangible assets are required to perform valuation tests for possible impairment of those assets (Step I). If those tests indicate possible impairment, then further analyses of the value of these assets are required (Step II).

Step I compares fair value of a reporting unit with its carrying amount (accounting value). If the fair value of a reporting unit is greater than its carrying amount (including recorded goodwill), then no impairment is deemed to exist. If the reporting unit's carrying amount (including recorded goodwill) is greater than its fair value, then an analysis of the amount of this impairment must be conducted (Step II).

Step II compares the implied fair value of the goodwill of the reporting unit with the carrying amount of that goodwill. SFAS states that "the fair value of goodwill can be measured only as a residual and cannot be measured directly," therefore, in Step II, an analysis similar to that conducted in a business combination (SFAS 141) is generally performed. Essentially, in order to determine the implied fair value of the goodwill, all assets must be valued and where appropriate, identified long-lived assets would be adjusted downward to their fair value. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of that goodwill, then a goodwill impairment loss must be recognized for an amount equal to that excess. The adjusted carrying amount of goodwill will be its new accounting basis.

Contact Thomas De Filippe, Mark Shayne, William Johnston, Keith Smith, or Scott Nammacher at Empire regarding how Empire can assist in meeting these new standards.

Empire has performed over 400 purchase price allocation engagements.

Bill Johnston

Managing Director