Goodwill Amortization Controversy and CEIV Highlight Fair Value in 2020
There is a lot in store for fair value measurements in 2020, reports Mark Zyla (Zyla Valuation Advisors). Zyla is a well-known authority in this area, and the third edition of his book, Fair Value Measurement: Practical Guidance and Implementation, was recently published. During a recent webinar, Zyla revealed some highlights of what’s on the front burner for 2020, including issues surrounding the FASB’s invitation to comment on the impairment of goodwill, an important update to the Certified in Entity and Intangibles Valuation (CEIV) credential, the increasing globalization of the profession, and upcoming guidance.
For practitioners not involved in fair value work, it’s important to keep up with developments in this area because many of the issues apply in other valuation contexts. Also, the area of fair value measurements has driven the development of overall business valuation theory in recent years. New thinking about control premiums (market participant acquisition premiums), contingent consideration, reconciling the income and market approach, and the multiperiod excess earnings method are examples of fair value issues that have spilled over into other areas of valuation.
Goodwill accounting debate
The FASB is considering whether to upend the current goodwill impairment model and revert back to one of amortization. This was triggered by comments the FASB received from public-company stakeholders about the costs versus benefits of the current model. Also, the IASB will issue a discussion paper on this same issue shortly.
The overall position of the valuation community is that the proposed change, from a user perspective, “doesn’t make sense” and that the benefits of the transparency and information the current impairment model provide outweigh the costs, Zyla says. A coordinated effort is underway in the business valuation profession to continue to provide feedback to rule makers and to educate users on this important issue. For example, the Appraisal Issues Task Force (of The Appraisal Foundation) recently invited representatives of the FASB, SEC, and PCAOB to a meeting to discuss this matter.
The International Valuation Standards Council (IVSC) has issued two perspective papers, and a third one is expected to be out this spring. The papers, which are extremely well done, examine whether the principles of business valuation are compatible with the concept of goodwill amortization. The first paper concludes that goodwill is not a wasting asset, a conclusion supported by empirical evidence. The second paper concludes that, while the current impairment model provides “significant” information to users of financial statements, it’s performance as a leading indicator has been inconsistent. The paper points out various reasons for this inconsistency and says that reverting back to amortization would only make matters worse. The paper lays the groundwork for “practical solutions to enhance the information value of the goodwill impairment test,” and these solutions will be presented in the upcoming third and final installment.
Zyla points out that the CFA Institute (CFAI) recently submitted its lengthy comment letter (41 pages) on the ITC in which it expresses serious concerns about the FASB’s thinking on this matter and the possible reverting back to amortization. The CFAI was very much against the FASB’s Private Company Council allowing private companies to amortize goodwill and is very much against this idea for public companies. The organization has stated that it feels that the FASB proposal will go through unless there is a little bit of a “revolution” from the user and investor community.
CEIV finishing touches
Zyla reports that the Quality Monitoring (QM) program for the CEIV credential has been finalized. The QM program was the last major issue to be ironed out for this credential, which is designed for professionals performing fair value measurements for corporate entities and intangible assets. The AICPA, ASA, and RICS offer the CEIV credential. The Big Four, as well as some smaller firms, embraced the program and put appropriate internal processes in place but stopped short of credentialing their people pending the finalization of the QM program. Now that the quality control aspects have been addressed, “we expect a significant increase in the number of individuals that will obtain the CEIV,” he says.
The QM program is a proactive process that is a combination of ongoing credential maintenance requirements and the completion of an annual Quality Compliance Assessment. The annual assessment will evaluate the credential holder’s implementation of the Mandatory Performance Framework (MPF) and determine whether it is being properly followed. The QM program officially began on Jan. 1, 2020, and credential holders will be required to submit their first Quality Compliance Assessment in 2021.
Regardless of whether you have the credential or not, the MPF represents a set of best practices for anyone practicing in this area, Zyla points out. That is, anyone doing fair value for financial reporting—not just CEIV holders—will be expected to comply with the MPF. It’s also a good idea for anyone in the valuation profession to read and understand the MPF as the concepts extend to areas of practice beyond fair value. For example, the MPF has a good section on prospective financial information (PFI) that can be applied to other valuation contexts.
A question from the audience: “The MPF was issued in 2016. Are there any plans for a revision?” There have been discussions among the VPOs that the MPF will become a “living document” and will undergo revisions if needed, says Zyla. There are plans to solicit feedback on the implementation of the MPF before deciding on any actual revisions.
Is the CEIV primarily for the Big Four, or are regional firms implementing it? While the larger firms have taken the lead in terms of training their people and designing internal processes, regional and local firms are expected to follow suit once more individuals obtain the credential, notes Zyla.
For valuation professionals in the U.S., why should international valuation standards (IVS) matter? For a number of reasons, says Zyla, who is the chairman of the Standards Review Board of the IVSC. Knowing IVS helps practitioners attract business from firms with operations outside the U.S. More importantly, the large accounting firms are increasingly incorporating IVS into audit reviews—even if the work does not involve an entity outside the U.S. For instance, Deloitte publicly announced that it has adopted IVS as part of its global approach to valuation.
In terms of what’s on the IVSC’s radar, Zyla gave some examples of projects under consideration:
- Revised standards related to valuation of inventory;
- An exposure draft on issues related to valuation modeling;
- As discussed earlier, a series of perspective papers on goodwill and the current impairment model for financial reporting (two have been issued, and the third is coming soon);
- The Financial Instruments Board is revising standards related to financial instruments; and
- An analysis of the impact of environmental, social, and governmental (ESG) considerations on valuation.
In addition to the topics the IVSC is examining, the AICPA has some pending guidance, most notably an accounting and valuation guide on business combinations. It’s expected that a draft of this guide will be issued by mid-2020. The AICPA guide, “Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies,” was issued last summer and is an “extensive, comprehensive and well thought out document,” says Zyla. Also, the AICPA issued a “Working Draft Valuation of Inventory” in late 2018 that explores some interesting fair value issues such as the timing and measurement of IP that gets integrated into products.
The Appraisal Foundation is gearing up and soliciting ideas and members for task forces and working groups to examine some specific topics, including economic obsolescence, company-specific risk, and other matters that are somewhat narrower than it has addressed before. So far, the TAF has issued four fair value for financial reporting advisories: contingent consideration, control premiums, customer-related assets, and contributory assets and economic rents.
For more information on goodwill impairments, please contact Jason Buhlinger, Principal, Transaction Advisory and Litigation Support Services, at firstname.lastname@example.org or 314.983.1310.
 The CFA Institute’s comment letter (dated Jan. 13, 2020) is available at cfainstitute.org/-/media/documents/comment-letter/2020-2024/20200113.ashx.
 “Possible Change to Goodwill Model Generates Buzz at ASA Fair Value Conference,” Business Valuation Update, Vol. 25 No. 9, September 2019.