ffirs.indd 1 10/6/2012 2:57:15 PM Fair Value Measurement ffirs.indd 1 10/6/2012 2:57:15 PM Founded in 1807, John Wiley & Sons is the oldest independent publishing com- pany in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management. ffirs.indd 2 10/6/2012 2:57:15 PM Fair Value Measurement Second Edition Practical Guidance and Implementation MARK L. ZYLA John Wiley & Sons, Inc. ffirs.indd 3 10/6/2012 2:57:15 PM Cover design: John Wiley & Sons, Inc. Cover illustration: © OlenaT/iStockphoto Copyright © 2013 by John Wiley & Sons, Inc. 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Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http:// booksupport.wiley.com. For more information about Wiley products, visit www.wiley. com. Library of Congress Cataloging-in-Publication Data: Zyla, Mark L. Fair value measurement: practical guidance and implementation / Mark L. Zyla. —2nd ed. p. cm. Includes bibliographical references and index. ISBN 978-1-118-22907-1 (cloth); ISBN 978-1-118-28456-8 (ebk); ISBN 978-1-118-28329-5 (ebk); ISBN 978-1-118-28279-3 (ebk) 1. Fair value—Accounting—Standards. 2. Fair value—United States. I. Title. HF5681.V3Z95 2013 657’.7—dc23 2012033891 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd 4 10/6/2012 2:57:15 PM To my wife, Jo Ann, and my son, Jack. You make this all possible . . . And to my dad, Larry Zyla, Thank you . . . for everything. ffirs.indd 5 10/6/2012 2:57:15 PM ffirs.indd 6 10/6/2012 2:57:15 PM Contents Preface xiii Acknowledgments xix Chapter 1: The History and Evolution of Fair Value Accounting 1 Why the Trend toward Fair Value Accounting? 2 History and Evolution of Fair Value 7 Fair Value Accounting and the Economic Crisis 15 The FASB and IASB Convergence Project 22 The Future of Fair Value Measurement 29 Conclusion 30 Notes 31 Chapter 2: Fair Value Measurement Standards and Concepts 37 FASB ASC 820, Fair Value Measurement 38 Disclosures 65 Fair Value Option 69 Conclusion 78 Notes 78 Chapter 3: Business Combinations 79 Mergers and Acquisitions 80 Accounting Standards for Business Combinations—A Brief History 83 ASC 805, Business Combinations 86 Other Business Combination Highlights 93 Subsequent Accounting for Goodwill and Other Intangible Assets 97 Conclusion 98 Notes 99 vii ftoc.indd 7 10/6/2012 2:57:32 PM viii ◾ Contents Chapter 4: The Nature of Goodwill and Intangible Assets 103 History of Intangible Assets 104 Intellectual Property 106 Economic Basis of Intangible Assets 106 Identification of Intangible Assets 108 Useful Life of an Intangible Asset 113 Intangible Assets and Economic Risk 114 Goodwill 115 Economic Balance Sheet 118 Conclusion 120 Notes 121 Chapter 5: Impairment 123 Evolution of Impairment Testing 125 Applicable FASB Guidance for Impairment Testing 127 Accounting for the Impairment of Long‐Lived Assets 128 Goodwill Impairment Testing 131 Testing Other Indefinite‐Lived Intangible Assets for Impairment 147 Conclusion 148 Notes 149 Appendix 5A: Example of a Qualitative Impairment Analysis—PlanTrust, Inc. 151 Financial Accounting Standards Board ASC 350, Intangibles—Goodwill and Other 151 PlanTrust, Inc. 152 Notes 170 Chapter 6: The Cost Approach 171 The Cost Approach under FASB ASC 820, Fair Value Measurement 172 Economic Foundation for the Cost Approach 175 Cost versus Price versus Fair Value 175 The Role of Expected Economic Benefits in the Cost Approach 178 Reproduction Cost versus Replacement Cost 178 Components of Cost 180 Obsolescence 182 The Relationships among Cost, Obsolescence, and Value 182 Physical Deterioration 184 Functional (Technological) Obsolescence 185 ftoc.indd 8 10/6/2012 2:57:32 PM