GOODWILL IMPAIRMENT OF A PUBLIC COMPANY
Appraisal Economics Inc. has tested for, and determined the amount of, goodwill impairment for each reporting unit of a publicly traded company for ASC 350. We considered the market capitalization of the common equity. We also valued the preferred equity held by a private equity fund, which included a liquidation preference and a conversion feature. We performed a discounted cash flow analysis for each reporting unit and the publicly traded parent company. Once we concluded the fair value of each reporting unit, we compared each reporting unit’s fair value to its book value. For the reporting unit that we determined was impaired, we appraised and subtracted the fair value of these assets from its enterprise value. The difference is the fair value of goodwill, and the amount by which the goodwill’s fair value was less than its carrying value was the amount of goodwill impairment.
With the issuance of Accounting Standards Update 2017–04 in January 2017, as early as January 2017 and no later than 2020, “Step 2” has been eliminated and goodwill impairment will be calculated as the excess of the reporting unit’s carrying value over the reporting unit’s fair value. This eliminates the need to value all of the company’s assets as though there were a business combination on the testing date, reducing the complexity and compliance costs associated with ASC 350.
PREMIUM PAPER COMPANY
Appraisal Economics Inc. has valued a globally recognized premium paper manufacturer. The company produces and distributes coated and uncoated paper products that are used for stationary, photo books, and high-end brochures and catalogues. The company has produced the official stationary used by several U.S. Presidents, the White House, and the Department of Defense, which awards paper certificates in conjunction with military honors including the Congressional Medal of Honor. We determined the business enterprise value of the company using the discounted cash flow method of the income approach and the guideline transaction and guideline company methods of the market approach. Then, using various quantitative methods, we determined appropriate discounts for lack of control and lack of marketability and applied these discounts to the company’s per share value. The results of our analysis were used for estate planning purposes.
MAJOR LEAGUE SPORTS TEAM
Appraisal Economics Inc. has performed a valuation analysis of a U.S. major league sports team and its related regional sports network. As part of our analysis, we also determined the value of derivative interests in various entities that own the team and network. Our valuation included the discounted cash flow method of the income approach and elements of the market approach, including the application of market multiples. We also determined the value of preferred securities associated with the aforementioned entities, based on a full credit analysis and examination of prevailing market interest rates for similar securities. Finally, we determined appropriate minority discounts and discounts for lack of marketability.
PREFERRED STOCK WITH EMBEDDED DERIVATIVE
Appraisal Economics Inc. has determined the value of the “embedded derivative” in convertible preferred securities issued by the operating partnership of a large publicly traded real estate investment trust (REIT). The preferred securities receive quarterly dividend payments and also contain an embedded derivative to convert into shares of the publicly traded REIT’s common stock, which is effectively a call option. We determined the fair value of the embedded derivative using binomial models and a “with and without” valuation method. We used a binomial model to determine the fair value of the aggregate preferred security and a second binomial model to determine the value of the preferred assuming that it was not convertible into common stock. The value of the embedded derivative is the difference in value indicated by the two models.
Please click for more information about the valuation of complex securities.