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August 3, 2008

SFAS 142 Valuation Case StudyPrepared for the American Accounting Association

Agenda

Page

1 Case Study Purpose 1

2 Case Background 3

3 Case Study Materials 6

3.1 Valuation Report and Schedules 8

3.2 Valuation Review Program 12

3.3 Key Issues Identification Exercise 16

4 Questions? 20

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Section 1Case Study Purpose

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association 2

• This SFAS 142 case study simulates an audit review of a valuation analysis performed for purposes of goodwill impairment testing

• The case is designed to introduce students to the following key concepts and skill areas:

– Fundamental features of a typical valuation analysis and narrative report

– Areas of significance upon which an auditor of a valuation analysis should focus his/her review

– Identification of key value-driving assumptions within a valuation analysis and the means of verifying their accuracy

– Methods of gaining comfort with the final conclusions of a valuation analysis

Fair value measurements are an integral part of any impairment analysis

Section 1 - Case Study Purpose

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Section 2Case Background

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

MMN Builders’ Impairment Test

4

• MMN Builders, Inc. is a hypothetical, privately-held, homebuilder operating in the Northeast and Southwest regions of the United States

• As a result of the recent nationwide downturn in the housing market, the company has had to incur significant impairment charges in its home inventories under SFAS 144

• These impairment charges constitute a “triggering event” for the testing of goodwill impairment under SFAS 142

• The company has two reporting units (Northeast and Southwest) both of which will require impairment testing

Section 2 - Case Background

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

MMN Builders’ Impairment Test (Continued)

5

• MMN Builders has engaged Appraisal Professionals, LLC (a hypothetical valuation firm) to perform the valuation analysis underlying its SFAS 142 test

Section 2 - Case Background

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Section 3Case Study Materials

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Materials Outline

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• Narrative report

• Quantitative valuation schedules

• Valuation review program (written exercise)

• Summary presentation instructions (oral exercise)

• Sample answer key

Section 3 - Case Study Materials

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Section 3.1Valuation Report and Schedules

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Valuation Analysis Contents

9

Subject Report Section Exhibit Number

Company and Triggering Event Background

Section 1

Industry Overview Section 2

Engagement Overview Section 3

Impairment Executive Summary

Section 4 Exhibits I and II

Section 3.1 - Valuation Report and Schedules

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Valuation Analysis Contents (Continued)

10

Subject Report Section Exhibit Number

SFAS 142 Step 1

Discounted Cash Flow

Public Company Multiples

Section 5 Exhibits III – VIII

SFAS 142 Step 2 Northeast Reporting Unit

Section 6 Exhibits IX - XIV

Assumptions and Limiting Conditions

Appendix 1

Section 3.1 - Valuation Report and Schedules

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Valuation Analysis Contents (Continued)

11

Subject Report Section

Accounting Guidance Appendix 2

Valuation Methodology Appendix 3

Certifications and Qualifications

Appendix 4

Section 3.1 - Valuation Report and Schedules

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Section 3.2Valuation Review Program

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Review Program Purpose

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• Provides a structured approach to reviewing valuations for goodwill impairment purposes in accordance with SFAS 142

• Contains leading questions and references to appropriate accounting guidance to assist students in their review

• Sections can be reviewed all at once or piecemeal

Section 3.2 - Valuation Review Program

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Review Program Content

14

• Valuation background

– Reason for impairment testing

– Identification of reporting units

– Assessing expertise of the appraiser

• SFAS 142 Step 1 – Valuation of reporting units

– Market Approach (public company multiples)

– Income Approach (discounted cash flow)

> Discount rate calculation (weighted average cost of capital)

Section 3.2 - Valuation Review Program

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Review Program Content (Continued)

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• SFAS 142 Step 2 – Valuation of intangible assets

– Customer relationships (excess earnings method)

– Trade name (relief from royalty method)

– Assembled work force (replacement cost method)

Section 3.2 - Valuation Review Program

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Section 3.3Key Issues Identification Exercise

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Purpose of the Exercise

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• Use the insights gained from answering questions in the review program to identify the key valuation issues requiring further investigation

• Develop strategies for testing and analyzing key valuation assumptions

• Gain an understanding of the sensitivities of these valuation assumptions to the ultimate impairment conclusion

Section 3.3 - Key Issues Identification Exercise

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Exercise Description

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• Using responses to the review program questions as a guide, identify 5-8 key value-driving issues requiring further diligence

• Key issues should be those with the largest impact on the ultimate impairment conclusion

• For each issue, students should show:

– Why the issue is critical?

– How sensitive is the impairment conclusion to the issue?

– Suggested verification procedures

– Methods for reaching an ultimate conclusion on reasonableness

Section 3.3 - Key Issues Identification Exercise

SFAS 142 Valuation Case Study • Prepared for the American Accounting Association

Potential Key Issues

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• Answer key provides specific examples of key issues

– Projection assumptions

– Understanding previous impairment charges for SFAS 144

– Trade name royalty rates

– Customer attrition assumptions

• Numerous other issues can be identified

Section 3.3 - Key Issues Identification Exercise

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Section 4Questions?