Professional's Guide to Fair Value

James P. Catty has been engaged in business valuations around the world for more than fifty years and has undertaken speaking engagements in China, Germany, Romania, Taiwan, Turkey, the U.K., and the U.S. He is Chairman of the International Association of Consultants, Valuators and Analysts (IACVA); President of Corporate Valuation Services Limited (CVS), Toronto; and of counsel to Hanlin Moss, PS in Seattle, Washington, and Xi'an, China. Catty is the author of the Wiley Guide to Fair Value under IFRS.

• Preface xi Acknowledgments xvChapter 1: Significance of Value 1Business Uses for Valuation 2Mergers and Acquisitions 2Financial Reporting 3Investment Bankers versus Valuators 8Valuation Requirements 8Litigation Risks 9Ten Commandments of Valuation 10Chapter 2: Fair Value Concept 13Relevant Pronouncements 14Definitions 14Market Participants 15Fair Value Accounting 16Revaluation under IFRS 16Other Types of Value 17Valuation Principles 19Reporting and Cash-Generating Units 20Chapter 3: Fair Value Framework 21Stage 1: Determine the Unit of Account 22Stage 2: Evaluate the Premise of Value 24Stage 3: Assess the Principal Market 29Stage 4: Establish the Most Advantageous Market 30Stage 5: Select Appropriate Valuation Methods 33Stage 6: Estimate Fair Value Conclusions 37Chapter 4: Taming the Future 41Definitions 42Effect of Market Participants’ Assumptions 43Scenario Analysis 45Scenario Implications 49Chapter 5: Projecting What Is to Come 53Base the Future on the Past 54The Truth Is in the Parts 56Avoid Unnecessary Risks 59Garbage In, Garbage Out 63Believable and Likely Conclusions 66Quality of Earnings 67Conclusion 68Chapter 6: The Market Approach to Fair Value 69Nature of Markets 70Classifying Assets 72Comparable Transactions 74Guideline Entities 76Guideline Entities Example 79Licensed Asset Example 82Conclusion 84Chapter 7: The Cost Approach to Fair Value 85Current Replacement Cost 85Deductions 87Integrating the Factors 90Residual Value 92Useful Lives 92Valuing Intangible Assets by the Cost Approach 97Conclusion 103Chapter 8: The Income Approach to Fair Value 105Capitalization Methods 106Income Approach—Discounting 110Terminal Amounts 115Application to Intangible Assets 116Chapter 9: Sources of Value—Profits 121Structure of Businesses 121Innovation 122DuPont Analyses 129Chapter 10: Sources of Value—Risks 135Reducing Risks 136Continual Monitoring and Testing 136Dealing with Biases 138Risk Rate Component Model 139Intellectual Capital Value Drivers 146Conclusion 147Chapter 11: Valuing Liabilities 149Liabilities Transferred Rather Than Settled 150Asset Retirement Obligations 157Contingent Liabilities 158Chapter 12: Business Combinations 161Do Mergers Pay Off? 162Why Merge? 163Determination of Synergies 166Intrinsic and Investment Values 167Quantification 167Chapter 13: Purchase Price Allocation 173Stage 1: Determine the Acquirer 174Stage 2: Establish the Consideration’s Fair Value 176Knowledge of the Industry 178Stage 3: Identify All the Items Involved 180Stage 4: Select Appropriate Valuation Techniques 188Stage 5: Estimate Fair Values and Reconcile Rates of Return 190Conclusion 192Chapter 14: Impairment 193Reporting Units 194Cash-Generating Units 196Goodwill 197Allocations 198GAAP Long-Lived Assets Impairment Test 198IFRS Impairment Test 200GAAP Goodwill Impairment Test 202Chapter 15: The Auditor’s Blessing 207Auditing Fair Values 208Conclusion 220About the Author 221Index 223