Financial Reporting

In the increasingly complex regulatory environment, Adams Capital takes a data-driven, independent approach to financial reporting compliance. In particular, fair value accounting requires often complicated valuation analysis to meet GAAP requirements. Working as part of the team tasked with successfully finalizing the audit report, we can help you meet complex standards through fair value measurement, purchase price allocation, stock-based compensation, and goodwill impairment testing. Count on us to hit deadlines, ensure compliance, and help you resolve issues with speed and confidence.

Fair Value Measurement

ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” It also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The definition retains the exchange price notion in earlier definitions of fair value and clarifies the exchange price as the cost to sell the asset or transfer the liability in the principal or most advantageous market for the asset or liability.

The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date. It is considered from the perspective of the market participant who holds the asset or owes the liability. For that reason, the definition focuses on the price received to sell the asset or paid to transfer the liability (exit price), not the cost to acquire the asset or received to assume the liability (entry price).

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Fair value measurement should be determined based on the assumptions market participants would use to price the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between:

  1. Observable inputs: Market participant assumptions based on market data from sources independent of the reporting entity
  2. Unobservable inputs: The reporting entity’s assumptions about market participant assumptions developed based on the best information available under the circumstances, particularly if there is little or no market activity for the asset or liability

Purchase Price Allocation

Determining the fair value of any asset requires the appraiser to perform various advanced valuation methodologies while complying with FASB Statements. Proper compliance with ASC 805 and ASC 820 is critical to producing a valuation report that supports the audit process. ASC 805 requires measuring and adding contingent consideration to total consideration.

Accounting for business combinations is complex and best addressed by an independent, third-party valuation firm that routinely assists clients with these matters. Appropriate to the circumstances, Adams Capital may use advanced measurement methods to determine contingent consideration fair value.

If the fair value of net assets acquired is less than the total consideration paid for the acquired entity, we will record the difference as goodwill. If the fair value of net assets acquired exceeds the consideration paid, the entity will recognize a gain on bargain purchase. Both scenarios must be properly explained for the specific transaction.

Adams Capital determines the fair value of the consideration, all assets acquired, and liabilities assumed. Our analysis includes the valuation of contingent consideration. If a fixed asset appraisal is required to meet the fair value standard, we integrate that detail into the overall purchase price allocation.

We work with accounting firms ranging in size from the Big 4 to sole practitioners to deliver valuation results that are supported by a detailed written report and work papers that address ASC 805 requirements and can be adopted easily by auditors. Because our staff includes former Big 4 professionals with audit experience, we can answer questions quickly and efficiently.

Adams Capital is a single point of contact for coordinated data requests. We use consistent assumptions and coordinated results for complex multidisciplinary projects, and ultimately reduce management work effort through careful planning and knowledgeable execution.

Stock Based Compensation

Private companies do not have a marketplace to set their value like publicly traded companies do so stock compensation raises a valuation issue. A detailed financial analysis of the company and of comparable publicly traded companies is required to determine value. The next step is to determine the value attributable to the option. Option pricing models estimate what an option would sell for in the market today (i.e., fair market value) given the terms of the option and the underlying stock characteristics, including future expectations. The Black-Scholes model is the preferred method for determining the value of an option for financial reporting and taxation. The main assumption underlying this model is that the underlying stock behaves in such a way that future price changes can be modeled by a probability distribution. The option’s estimated fair market value is determined by the modeled future values and a host of other variables including:

  • ​Underlying stock’s value
  • Exercise price of the option
  • Underlying stock price volatility
  • Dividend expected
  • Risk-free interest rate for the option term remaining
  • Time until expiration (or the expected life) of the options
For companies with complex capital structures including multiple rounds of preferred stock, warrants for preferred stock, and common stock options, determining the common stock value is complicated. Adams Capital considers and applies the Current Value Method, the Option-Pricing Allocation Method, and the Probability Weighted Expected Return Method where appropriate. ​Stock option valuations are complex and specific to the situation. Adams Capital has the experience, perspective, data, and credentials to make defensible assertions on the value of any type of stock option or bonus share.

Goodwill Impairment Testing

The newly simplified goodwill impairment test is a single step quantitative evaluation. Fair value, as prescribed by ASC 820, sets the standard of value. Goodwill and other intangible assets typically are tested annually, unless there is:

  • ​A significant adverse change in legal factors or in the business climate
  • An adverse action or assessment by a regulator
  • Unanticipated competition
  • A loss of key personnel
  • A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be disposed of or sold
  • The testing for recoverability under Statement 121 of a significant asset group within a reporting unit
  • Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
Goodwill and indefinite-lived intangible assets must be tested at the reporting unit level. Identifying a company’s reporting units can be a critical part of the ASC 350 analysis. Adams Capital works with clients and auditors to appropriately recognize the reporting units.