Recent pronouncements by the Financial Accounting Standards Board (FASB) have had a profound effect on the valuation profession. Statement of Financial Accounting Standard (SFAS) 141 addresses accounting for intangible assets acquired in a business combination. SFAS 142 addresses accounting for all intangible assets, including goodwill, after their acquisition. These new standards create the need for valuation of intangible assets for financial statement purposes.
SFAS 141 requires an entity to allocate the purchase price of an acquired entity to assets and liabilities at their fair values on the date of acquisition.
The most significant change brought about by this pronouncement is the elimination of the amortization of goodwill for financial statement purposes. SFAS 142 requires a two step impairment test. The fair value of a reporting unit is first compared to its carrying value, including goodwill. Then the implied fair value of the goodwill is compared to the carrying value of the goodwill. If the fair value is lower, it is considered to be impaired.
This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice.
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