A mix of stakeholders participated in a full-day roundtable discussion at FASB headquarters in Norwalk, Conn., on November 15. The topic: the FASB’s Invitation to Comment (ITC) on moving from the current impairment model for goodwill to one of amortization or a hybrid approach. Other issues included whether other intangible assets should be subsumed into goodwill and whether there should be more disclosures about goodwill and intangible assets.

The valuation profession was well represented at the roundtable—and so were users of financial information (including investors), practitioners, preparers, academics, standard-setters, and regulators. Members of the valuation profession have serious concerns over going back to a model that treats goodwill as a wasting asset. Here are some key points that were made during the morning session of the roundtable:

·         Most users support impairment—there is definitely “news” in an impairment charge. That is, it is not solely a lagging indicator of company performance (academic studies support this), so the impairment process is “overwhelmingly” useful as a signal of what’s to come.

·         The acquisition of a business assumes a going-concern premise, so the concept of goodwill amortization is not compatible with this premise.

·         In practice, an acquired firm and its goodwill get integrated into an operating or reporting unit and it becomes nearly impossible to track goodwill back to the specific acquisition in order to evaluate performance. Added disclosures about future impairment charges should talk about the reason—whether it’s because of the acquisition or the legacy operations.

·         The higher up you go in terms of the level at which you test goodwill, the less meaningful it becomes. Testing at the entity level (versus an operating-unit level) could mask poor performance at lower levels.

·         Goodwill has different elements, some which may be wasting but others may not be (such as synergies, as one commenter pointed out—but that’s debatable). Different companies can have very different goodwill elements of variable magnitudes. Some commenters are inclined to let management decide the useful lives of the components, while others disagree because you’ll get a wide disparity in lives.

·         Increased disclosures will be helpful (such as what the primary intangible asset was that the acquirer wanted), but there’s a concern about information overload.

·         If a default useful life is used with amortization, it should be set at a minimum of 10 years and allow for management judgment (with disclosure) and also triggering events. A commenter from Japan said they use a combination of amortization and impairment and most companies choose 10 years or less for useful lives (20 years is the max).

·         There is a general agreement that it is important for global standards (IFRS) to converge. The IASB is also exploring whether to amend its approach to accounting for goodwill, but it is divided about the benefits of reintroducing goodwill amortization to IFRS standards. The IASB plans to release a Discussion Paper in early 2020 for a 180-day comment period to weigh stakeholder interest in amending IFRS 3, Business Combinations and IAS 36, Impairment of Assets.

·         Speaking of convergence, commenters from the M&A world had different experiences about the impact of accounting rules on deals. One said that, at the margin, different accounting rules may scuttle a deal. When using an EPS model, acquirers will pay more when impairment is used versus amortization (academic research backs this up). But another commenter said that, in his 20 years of M&A experience, he never saw that happen.

·         In response to a concern about what methodologies valuation experts use in valuing intangibles, it was stressed that there is a “very robust” body of knowledge and standards that all experts follow, such as The Appraisal Foundation’s financial reporting valuation advisories and AICPA guides, such as the upcoming guide on business combinations.

What’s next: The FASB has done an excellent job of laying out the issues and soliciting comments from a wide variety of stakeholders. But this is just the first step. Next, the comments will be processed, and a presentation will be made to the FASB board, which will decide on what action to take. Typically, an exposure draft would be issued and go through one or more revisions before rules are finalized. This entire process can take up to several years to complete.

If the appraisal profession is conflicted over the validity of calculation engagements, so are courts. Courts have responded in different ways to questions about the reliability and usefulness of calculation engagements depending on the circumstances of the case. The cases do not offer a bright-line rule that appraisers can follow; acceptance seems to be situational.

In Rohling v. Rohling, an Alabama divorce case that centered on the valuation of the husband’s dental lab, only the wife offered expert testimony from a certified valuation and financial forensics analyst. The expert worked pursuant to a calculation engagement. The trial court rebuffed the husband’s efforts to discredit the testimony, noting the expert was well qualified to provide an opinion based on the requirements of a calculation engagement as well as a valuation engagement and he used “methods recognized and accepted by [the] accounting industry for accountants conducting ‘calculation engagements.’” Importantly, “the Husband did not employ his own expert or pay the increased fee to [the expert] to conduct the more rigorous ‘valuation engagement.’” The appeals court affirmed.

In Surgem, LLC v. Seitz, a 2013 New Jersey appellate ruling on a buyout dispute, the court rejected the defendant expert’s calculation of value. The expert testified that the defendant had not provided the materials necessary to perform a valuation and said “more work should have been done” to prepare a fair valuation of the company. Importantly, the plaintiff offered countervailing expert testimony. The plaintiff’s expert said the opposing expert’s per-share price was an “arbitrary amount” based on unreliable projections. The trial court noted that, by the defense expert’s own account, the work fell far short of an “actual fair valuation of [the company].” Upholding the trial court’s ruling, the appellate court said the lower court had given sound reasons for rejecting the calculation of value.

In contrast, in Hipple v. SCIX, LLC, a 2014 case litigated in federal district court, the former wife sued her ex-husband and his business for fraudulent transfer of the company’s assets and the proceeds of the assets. She offered expert testimony on the value of the company’s  assets. The expert had done a calculation of value, explaining that he had limited information about the company’s financials and therefore was not able to do a full appraisal. The defendants filed a Daubert motion to exclude the testimony, which the court denied. It found the AICPA approved of both calculation and valuation engagements and there was no reason to prevent the trier of fact from hearing the expert’s testimony. The expert explained why he did not perform a full valuation. Questions about the specifics of the testimony went to weight not admissibility, the court decided.

Finally, in A.C. v. J.O., a 2013 New York divorce case, the husband offered a preliminary report from a financial expert who had done valuations of the wife’s professional practice at the beginning of the divorce proceedings, while the wife still cooperated with the expert. The expert explained that he never had been authorized to do work beyond the initial report. Had he prepared a final report, he would have audited the spouses’ books and records to confirm the accuracy of the earlier information. When the wife contested the validity of the preliminary appraisal, saying it was only a “calculation report,” the trial court noted the expert was qualified and his work was preliminary because the wife had decided to stop cooperating. Her uncooperative attitude should be held against her interests, not the husband’s, the court found.