Auditing fair value measures.

• Author: Zyla, Mark L.

What auditors need to know when working with valuation specialists

Financial Accounting Standards Board (FASB) pronouncements that address financial reporting of business combinations (FASB Statement of Accounting Standards No. 141, Business Combinations,) and the recognition of the continued validity of reported goodwill (FASB Statement No. 142, Goodwill and Other Intangible Assets) require assets to be recognized at their respective fair values. Measuring assets after a business combination to state their fair values on the balance sheet is a complex process. Consequently, the acquiring entity often retains valuation specialists to assist management with the estimate of the fair value of each asset, particularly intangible assets, for the allocation of purchase price. As part of the requirement of obtaining sufficient competent audit evidence to provide reasonable assurance that the stated fair values conform to generally accepted accounting principles (GAAP), the acquiring company's auditor has to gain competency in evaluating the qualifications of the valuation specialists and their work product. As such, auditors must understand the concept of fair value and how it is measured.

To provide guidance for auditing fair value measurement and disclosures, the Auditing Standards Board (ASB) recently issued Statement on Auditing Standards (SAS) 101, Auditing Fair Value Measurements and Disclosures (AICPA, Professional Standards, vol. 1, AU sec. 328), which is effective for auditing financial statements on or after June 15, 2003.

SAS No. 101 provides guidance to auditors on how the management of an entity determines fair value and whether it conforms to GAAP. The statement provides broad guidance for auditing fair value measurements, one of which is using the work of a valuation specialist. As such, auditors should become familiar with certain fair value concepts that a valuation specialist may use.

Estimating fair value may seem complex. However, just four basic concepts are involved in a valuation related to fair value for financial reporting:

* The standard of value

* Market participants

* The three basic approaches to value

* Working with a valuation specialist

The standard of value: Fair value

The first concept in auditing fair value measurements that an auditor should understand is the standard of value. The standard of value in financial reporting is one of fair value, which is defined in FASB Statement No. 141 as "the amount at which...