We at Rivem Consulting assist our clients to efficiently and cost effectively complete an engagement. We’re knowledgeable and experienced in the areas of valuation and business analytics. Our approach is consultative which helps our clients, accountants, and attorneys make informed decisions for the best course of action. We explore options with you and guide you throughout the engagement process to the finish line.

Goodwill Impairment Analysis (ASC 350)

Impairment analysis is typically performed annually to satisfy the financial reporting requirements of an entity. Goodwill impairment is performed on a reporting unit or on an asset level. ASC 350 outlines the testing of impairment in two steps. First, the reporting unit is tested on a fair value basis (or on a qualitative analysis basis). If impairment is not indicated, the entity passes the Step 1 test and no further testing is required. However, if Step 1 test indicates a fail, a Step 2 analysis will be required. A Step 2 analysis involves valuing the assets and liabilities of the entity as if it is newly acquired. The Step 2 analysis measures the impairment amount (“write-down”), if any.

Disposal of Long-Lived Assets (ASC 360)

A long lived assets (or group of assets) should be tested if adverse events cause the likelihood of assets being impaired. Under ASC 360, the intangible assets (or group of assets) is tested for impairment on a pre-tax undiscounted cash flow basis. A recoverability test is performed relative to book values to determine if impairment does exist. In certain instances, it may be advisable to proceed directly to fair valuing the assets (or group of assets) rather than testing the assets first for impairment and subsequently proceeding to fair valuing the assets.

Business Combination/Purchase Price Allocation (ASC 805)

Fair value guidelines require the allocation of purchase consideration to various assets and liabilities acquired. A transaction can be structured as an asset purchase or a stock purchase. For purposes of fair valuation, we will apply the most appropriate method of value. The scope of an engagement typically includes valuation of identifiable intangible assets and contingent liabilities (“earn-outs”) if any. Depending on the industry which the acquired company operates in, the list of the intangible assets may include: Customer Relationships, Tradename/Trademarks, Intellectual Property (IP), Non-Competition Agreement, Technology (patented or unpatented), Know-How, In-Process Research and Development, Backlog, and Deferred Revenue. Contingent considerations are typically valued using a probability based method which includes probability weighted discounted cash flow, a plain vanilla option pricing method, or in complex cases, the use of a Monte Carlo simulation.

Stock-Based Compensation (ASC 718)

The entity issuing a stock-based compensation is generally required to recognize compensation expense over an appropriate service period. Stock compensations are issued in various forms and in various vesting schedules. The most common forms are the issuance of time-based plain vanilla stock options and restricted stock units. Other forms include stock appreciation rights, stock purchase plans, and long-term incentive plans (LTIPs). Market-Based and performance-based awards are more complex form of awards issued. Generally, the value of these awards are directly tied to some performance measure such as an internal rate of return (IRR), certain profit targets, or total shareholder return (TSR) relative to peer group of companies or some other benchmark. The most appropriate method to value these instruments is the use of a Monte Carlo simulation that takes into consideration probability of vesting and a range of  forecasted stock prices.

Convertible Financial Instruments

Convertible instruments such as convertible preferred stock or convertible bonds are referred to as hybrid instruments given their equity and debt-like characteristics. These instruments generally can be converted, or in some cases, exchanged to a common stock. Depending on the conversion feature and the structure of the instrument, a conversion option may be exercised at any time throughout the life of the instrument, at the occurrence of certain events or milestones, or in an event of change in control or an IPO. For accounting purposes under the guidance of ASC 815 – Derivatives and Hedging and EITF 07-5, an embedded feature of a convertible instrument may need to be bifurcated and valued separately from the host debt-like contract. This will be a requirement for GAAP purposes if certain criteria are met that identifies the embedded feature as a derivative instrument. Typically, the relevant features of the instrument are taken into consideration for fair value purposes. These features include any anti-dilution provisions, mandatory conversion, redemption and put rights, and other features that may potentially have an impact on fair value. Given the complex nature of these instruments, a simple option pricing method typically will not be adequate. Valuation of these instruments generally require the use of a lattice model or Monte Carlo simulation.

Warrants and Options

The issuance of warrants have become increasingly popular as part of raising capital or fulfilling payment obligations in a form of equity. Warrants are often issued to grant investors the right to invest capital in the future at a predetermined set price. It is also issued as part of negotiations to attract investors in closing a transaction. Preferred, debt, and private placement transactions are often issued with warrants and are bundled with the security being issued as units. For accounting purposes, warrants are classified as either equity or liability instruments – depending on certain criteria under current accounting guidance. A periodic mark-to-market valuation is generally required for instruments classified as liability. Certain features and provisions of warrants such as anti-dilution, redemption, put or exchange features are taken into consideration for fair value purposes. Valuation of these types of instruments usually require the use of a more complex option pricing methods such as Monte Carlo simulation or other appropriate option pricing methods.   At Rivem Consulting, we are experts in valuing complex financial instruments.