DGC Enewsletter 11-09

Intangible Assets: An Oxymoron
By James Lemay, CPA

Intangible assets. In this economy, it sounds like an oxymoron. If you can’t touch it, see it, and independently apply a value to it, does it really have any value? Some intangible assets (such as patents or license agreements) have a finite life and a value ascribed to them, typically based upon historical cost. Under generally accepted accounting principles [GAAP], intangible assets with a finite life are amortized over their useful life, and eventually written down to zero value. This is not the case with goodwill or indefinite-lived intangible assets.

Under GAAP, goodwill and indefinite-lived intangible assets are written down only when impaired. Testing for impairment must be done at least annually. The test for indefinite-lived intangible assets simply compares the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, and impairment is recognized for the difference.
The goodwill impairment test requires two steps and is done at a level within the company referred to as the reporting unit. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and step two is not required.

However, if the fair value of the reporting unit is below its carrying value, step two must be performed to measure the amount of impairment loss, if any. (It is still possible that no impairment write down is required.) This step requires a company to assign the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. (This is an exercise that is only done to test for goodwill impairment, the carrying values of the assets and liabilities should not be adjusted.) The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the implied fair value is less than the carrying amount of goodwill, an impairment loss is recognized for this difference. If the implied fair value exceeds the carrying amount of goodwill, no impairment loss is recorded.

Companies may utilize a variety of valuation techniques to determine fair value, including the “income approach.” This approach includes many facets, including converting future cash flows or revenues expected to be generated from a reporting unit into a current amount (fair value).

Since Gross Domestic Production [GDP] peaked in the fall of 2008, the decrease in the macroeconomic environment and the broad decline in core industries (service, retail, hospitality, construction, and manufacturing) have caused public companies to write off almost half of the prior year indefinite-lived intangible assets, including goodwill, as impaired. As GDP continues to fall through the third quarter of 2009, private companies have faced the same business challenges, eroding their enterprise value. Private company impairments of goodwill and intangible assets in 2008 appear to only be the first installment necessary to adjust the inflated value of acquisitions over the last three to five years.

Because the income approach valuation method is based upon projections, it is very sensitive to the estimates and assumptions built into the projections. Many companies need to update their long-term growth rate, normalized return and cost of capital to take into consideration the current market and outside investor assessments. Among the industries mentioned earlier, most have published growth rate projections around 3% annualized growth over five years. Companies using a cash flow projection as part of the valuation model that shows a single year decrease and subsequent quick return to 2007 levels (or 2007 growth rates) will face tough questions upon audit.

The impact of these reductions in goodwill drags down financial statement net income, and ending equity, generally without an additional tax deduction (unless there was an actual asset disposal or abandonment). While this may seem to many companies to be the worst of all worlds, since it may also impact debt covenant compliance, financial statement users are becoming much more critical of goodwill carried on financial statements and generally welcome the adjustment. Many public and private companies have been required to write down or write off questionable intangibles to more conservative values based on the impairment test. This adjusted value not only reflects the reality of the current economy, but it also matches the expectations of their financial statement users.

For more information regarding goodwill and/or intangible assets, contact Jim Lemay at 781-937-5118 or jlemay@dgccpa.com.

Prevent Identity Theft By Recognizing “Phishing” Schemes
DGC urges you to protect yourself from suspicious emails or “phishing” schemes. Phishing is the creation and use of email and websites designed to mimic legitimate business emails and websites. The most common form is the act of sending an email to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft.

In recent weeks, many of our clients have received phony emails disguised as tax correspondence from the Internal Revenue Service. Be advised, the IRS does not send unsolicited email to taxpayers about their accounts. Nor does the IRS request detailed personal information such as PIN numbers, passwords, or similar secret access information for credit cards, bank accounts, or other financial accounts. Do not download any attachments or respond to any such email request. If these attachments are downloaded you may be making your computer vulnerable to viruses or putting any personal information stored on your computer at risk by giving a scammer remote access to your computer.

If you receive any email correspondence from a taxing authority, please contact DGC immediately so that we may assist you in determining the best way to handle the situation.

For more information on IRS email scams please click on the links below. These articles provide more information on this problem and how you can report suspicious emails:
http://www.irs.gov/newsroom/article/0,,id=213862,00.html?portlet=6
http://www.irs.gov/privacy/article/0,,id=179820,00.html?portlet=1

DGC to Present Workshops at Build Boston
The 25th annual Build Boston convention and tradeshow will be taking place November 18-20, 2009 at the Seaport World Trade Center. DGC will be presenting three (3) workshops. Attendees can receive a 15% discount on registration fees by using the DGC promo code. Use promo code BB09SPEAK when you register for any of the following workshops:

Capitalizing on government contracts: re-examine your overhead rate status
Wednesday, Nov. 18
8:30 - 10:00 a.m.
Presented by: Chad DaGraca, CPA and James Lemay, CPA

Top tax strategies for A/E/C professionals
Wednesday, Nov. 18
6:00 - 7:00 p.m.
Presented by: Stephen Minson, CPA and Joel Rothenberg, CPA

Doing business in a recessionary environment
Thursday, Nov. 19
8:30 - 10:00 a.m.
Presented by: David Sullivan, CPA, Chad DaGraca, CPA and James Lemay, CPA

Use promo code BB09SPEAK when you register and receive 15% off not only these workshops, but all a la carte workshops, keynotes and tours. Additional information and registration is online at www.buildboston.com.

Take Advantage of the DGC Tax Planning Guide
With prices up and the economy down, minimizing your tax burden is more important than ever. To save as much as possible, you’ll need to proactively look for ways to reduce your taxable income and take advantage of every tax break you’re entitled to.

Our 2009-2010 Tax Planning Guide is now available online. It can help you identify the steps you can take to reduce your personal and business tax liability. Best of all, you can access a copy 24/7 at http://www.dgccpa.com/Our-Services/Tax-Services.

Please review the information the guide provides and note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then call us with any questions you may have about these or other tax matters. At DGC, we are thoroughly familiar with the latest tax laws and tax-reduction strategies, and are eager to help you take full advantage of them.

Call us today at 781-937-5300 to schedule a time for us to meet and talk about ways you can lighten your tax burden and better achieve your financial objectives.

Nov. 17 – REFA – Q4 ’09 – Commercial Real Estate Lending Update
Nov. 18 – Prince Lobel Breakfast Seminar – The Anatomy of a Wage and Hour Disaster
Nov. 18 – SBANE – MA Breakfast Series
Nov. 18 -19 – Build Boston (DGC presenting)
Nov. 19 – BOMA – TOBY & Industry Awards
Nov. 19 – Health Sciences Entrepreneurs – Roundtable discussing tools of entrepreneurship (DGC presenting)
Dec. 3-4 – 2009 AEC Mergers & Acquisitions Summit (DGC presenting)
Dec. 8 – Association for Corporate Growth – Emerging Professionals Holiday Networking Event
Dec. 9 – Boston Chamber – Women’s Networking Breakfast
Dec. 10 – Turnaround Management Association – Holiday Party
Dec. 16 – Boston Estate Planning Council Holiday Reception (Sponsored by DGC)