FASB 157 Statement on Value and the Effect on Sections 141 and 142

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The valuation of intangible assets on company balance sheets are going to affect a broad range of companies. Approximately half of the companies spoken to recently indicated that the requirement to apply fair value based on a market comparable exit price, as opposed to an entry price, is going to have some effect on their company's assessment of the fair values of their assets.

The new FASB Statement 157 formalizes the requirement that intangible assets and intellectual property be valued at so-called "fair value." This fair value is broadly described as the price that would be received when selling an asset or that would be paid to transfer a liability in an orderly transaction between willing market participants as of the appropriate date. What this means is that fair value should reflect an actual transaction value as of a given date.

While Statement 157 does not introduce any new requirements that affect 141/142, it does clarify and mandate the use of fair value. The definition of fair value does include some key differences:

First, and perhaps most importantly, fair value should be based on an exit price. In other words, the price for an asset at the point in time at which it would be sold, rather than the entry price, or price at which the asset would be bought. This exit price valuation requirement is in place now regardless of whether the company holding the asset plans to sell it or not.

Secondly, and of equal importance, 157 emphasizes certain valuation techniques. In particular, it shows a clear preference for market-based valuation rather than a theoretical valuation for a specific entity. This has been put in place in the hopes that the optimistic valuation numbers that often used by asset owners will be replaced with the realism or skepticism that typically characterizes an arm's length sale to a risk-adverse buyer.

Underpinning Statement 157 is the fair value hierarchy of methodologies and valuation standards. The hierarchy ranks the quality and reliability of the information used to determine the accuracy of fair values -- therefore market comparables and quoted prices are the most reliable valuation inputs and the market comparable method should be the technique used wherever possible. On the other hand, modeling values that include inputs on potential value based on projected but yet unobservable data are the least reliable under 157. An example of this latter type of input would be the valuation of shares of a privately-held company where the value is being based on projected but unproven cash flows.

What this all means is that the valuation of intangibles on company balance sheets are going to affect a broad range of companies. Approximately half of the companies spoken to recently indicated that the requirement to apply fair value based on a market comparable exit price, as opposed to an entry price, is going to have some effect on their company's assessment of the fair values of their assets. However, as of yet, most companies have done little to quantify this impact. What is also important is that these same companies believe that Statement 157 is going to require far greater use of external IP and intangible asset valuation specialists, as opposed to reliance upon internal professionals to do these valuations.

Weston Anson, Chairman of CONSOR, and the company's Chief Economist Fernando Torres commented in a conversation that they both felt that this will bring a higher degree of both realism and professionalism to the valuation of these asset groups.

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