hopefully this is a quick question, but i doubt it. we’re doing testing under sfas 144 for a client’s reporting unit. the reporting unit consists of three small acquisitions made over the last 12-15 mos. we did all of the original 141 work. for two of the acquisitions, the only intangible identified was a customer base. for the third, the only one was technology. management has basically conceded that the third acquisition was a bust (they aren’t even trying to sell any of the products; they’ve even suspended future development for another 18-24 mos). now we need to do the 144 test (i was brought into this later on, so i’m not exactly sure why). my boss used to work for one of the big 4 and when he called for some advice, they said that its ok to value the entire reporting unit’s customer base and technology as one big whole, especially if the customers and cash flows aren’t separable at the original level. here is my question. when valuing the customer base, do we start with the customer base they have now or start with the customer bases when they were acquired and subtract those that were lost? in other words, say the two reporting units that had customer bases had a told of 100 customers between them at the time of the acquisition. Now assume that since then, they lost 10 customers and have acquired 20. Do you start with a customer base of 90 (100 - 10; remembering you’ve expensed/amortized the theoretical loss of those customers)? Or, do you now value the current 120 customers as is (100 - 10 + 20; this seems strange because you’re introducing a whole new asset on the books by doing this). another question is along the same lines. originally when we valued the customer bases, we ignored any potential synergies. now, they have all kinds of cross sales on the revenue side and savings on the expense side. if we use their current sales and expense forecasts that incorporate these synergies for our 144 work, are we again introducing another asset and changing the asset’s original nature? we have other questions, but i’ll leave it at this for now. thanks in advance for the help.
First of all 144 impairment is for long lived assets, so are you testing for intangible (customer relationships) and (or) goodwill impairment under SFAS 142? Well, whatever your case is, you want to be as thorough and conservative with your estimates and projections. If I were on your team, I’d base my projections on my customer base today, and take it from there. Being overly optimistic by not basing your valuation on today’s picture would only result in more write-downs later on (you’ll be lucky to get the auditor on the other side to sign off on it, by not valuing your customer base on today’s figures). Also, since there seems to be considerable impairment (the SEC loves to review all workpapers especially for impairment and other write-downs) net-net, I’d expect to see a declining customer base or at least a stable or increasing cost structure going forward to support the bleak outlook for your client. Synergies. Assuming you are infact re-valuing a customer relationship for 142, you’ll start with projecting revenues from today - attributable to your custmers and then make adjustments for growth and attrition, then apply your COGS & SG&A margins to get to EBIT. Then you’ll tax effect EBIT and apply your CAC charges to arrive at your excess earnings which you’ll finally discount at your WACC. The synergies going forward, can very well be captured in revenue growth and/or improved margins via cost savings, but if that were truly the case, you won’t be testing for impairment in the first place. ? You can certainly make the case and claim that in the original 141 PPA, you did not anticipate huge synergies (cost savings, revenue growth), but that since you’re testing for impairment right now, you want to include it…but that’s a tough sell.