What is FAS and Why Should you Care...

Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting that governs the preparation of financial reports by nongovernmental entities.

In 2001, FASB (Financial Accounting Standards Board) enacted a series of standards that require all GAAP (Generally Accepted Accounting Principles) compliant companies to restate the value of all assets on the balance sheet when a company was acquired or merged with another company.  FAS 141 (ASC 805) required that purchasers allocate the total consideration paid in a business combination to the identified acquired assets and liabilities, according to their fair value. Any remainder of consideration above the fair value of identifiable net assets acquired is to be allocated to goodwill.

I.              What types of Assets are appraised?

Assets include all tangible and intangible assets as well as all liabilities. The assets are classified in two main categories:

Tangible Assets:    Machinery & Equipment

                             Inventory

                             Real Property (Land & Buildings

Intangible Assets:  Patents, Trademarks, Favorable Contracts, Assembled Workforce, Goodwill Etc.

II.            Who needs a FAS Appraisal?

 a.  Company is acquiring or merging with another company.

 b.  Lenders financing an acquisition or merger.

 c.  Equity Firms acquiring companies.

 d.  Audit or Accounting Firms that need to hire an independent appraiser.

  e.  Audit or Accounting Firms that do not have valuation specialists.

  f.   Business Valuation Firms that do not have M&E or Real Property valuation specialists.

III.           What is the Standard of Value for FAS?

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”.  Along with that refinement of the definition of fair value, FASB provided some additional guidance on how to apply observable market and cost data in estimating the fair value of an asset or liability.

IV.           What appraisal approaches are utilized in Hilco FAS M&E appraisals?

  • Cost Approach: This approach considers that the maximum value of a property to a knowledgeable buyer would be the amount currently required to construct or purchase a new asset of equal utility, adjusted for all forms of depreciation

  • Market Approach: This approach involves the collection of market data to determine the desirability of the assets including recent sales or offerings of similar assets currently on the market

  • Income Approach:  Not typically used in M&E appraisals. 

V.            What client/company supplied data is required for a FAS M&E appraisal using the cost approach? 

  • A historically accurate Fixed Asset Listing (FAL) in Microsoft Excel. The FAL should include for each asset:  an asset number, asset description, acquisition date, acquisition cost, accumulated depreciation and net book value. 
    Acquisition date and acquisition cost must be historically accurate, i.e. the dates and numbers have not been “allocated” by an earlier acquisition or adjustment.

  • Plant location, square footage, type of operation.
  • The Cost Approach using a historically accurate FAL already captures all of that data.  It requires that Hilco inspect only a sampling of the M&E.  If there are multiple plants, a site visit to each plant may not be required.
  • Hilco utilizes the cost approach technique “Trend & Depreciate” to value the assets.  The sampling of assets inspected is also valued using the market approach and is used to verify that our Trend & Depreciate formulas are working properly.
  • The site visit for the Cost Approach is much less time consuming than for the Market Approach.  In the Cost Approach, the most time consuming task after site inspection is asset classification.  Each asset line item must be read and assigned an asset classification. 

VI.           What client/company supplied data is required for a FAS M&E appraisal using the market approach?

  • Plant location, square footage, type of operation.
  • The Market Approach methodology requires that Hilco produce on site generated list of assets for each location similar to our process for appraisals for Asset Based Lending.  In addition, data is gathered on Process Related Electrical & Piping Distribution Systems, Foundations, Pits, Installation Costs, Etc.
Each item must be researched for market comps and further calculations need to be made to account for installation costs.

 For more information contact:

Derek Brennan
M&E Appraiser
Hilco Valuation Services, LLC
(847)
849-2958

dbrennan@hilcoglobal.com