Brittney Brooker MEMORANDUM To: Manager of Snowy Ridge Ski Resort From: Kate Smith, Chief Accountant for Recreational Properties, Inc. Date: October 27, 2010 RE: Fair Value Assessment The subsequent valuations are consistent with the Statement of Financial Accounting Standards no. 157, defined 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. ” Snowy Ridge Ski Resort was acquired on June, 30th, 20X0 by Recreational Properties for $46,050,000.
The fair value of identifiable assets and liabilities acquired are reported as $42,500,000, resulting in a computed goodwill of $4,000,000. It should be noted that goodwill has not been adjusted since the purchase. In order to test goodwill for impairment, it was first necessary to compute the fair value of Snowy Ridge’s current identifiable assets (see table 1). The fair value of marketable securities reflected the total quoted market prices for the bonds held by Snowy Ridge equal to $4,565,000.
This value was directly quotable and was categorized as a level 1 in the valuation hierarchy. The mountain division fair value estimate was based on a market approach by directly comparing Snowy Ridge to very similar ski areas sold within the last year (mountain divisions only). It was determined that the sales were expressed as a multiple of sales revenue equal to 175%. The average sales revenue generated by Snowy Ridge was $5,500,000. After applying the multiple to $5,500,000 the new computed fair value became $9,625,000. This was level 2 categorization on the valuation hierarchy.
The fair value of the lodge division was determined using a market approach. The fair value was expressed as a multiple of the current year revenue of $3,028,000. Research revealed that the mean multiple of the five mountain resort lodges sold in the Western United States within the last year was 3. 75. After applying the multiple to $3,028,000, the new computed fair value became $11,355,150. This was categorized as a level two because a direct market comparison could be made. It should be noted that an income approach could have also been used.
Using a determined market discount rate of 6% and current year revenue of $3,028,000 at a four year discounted rate, the value would have been $12,040,548. Because adequate market information was available to make a more accurate estimate of the fair value, this is the estimate that was chosen. The real estate division was estimated to have a fair value of $13,890,000. This was determined by totaling the number of lots expected to sell within the next four years and multiplying it by the price per lot of $180,000. After determining total lot sales, a 20% discount rate was applied as suggested by current market conditions.
Given the unique nature of the real estate development, it is not believed that there are any comparable developments to find a market multiple. After calculating the fair value of Snowy Ridge’s assets it was necessary to test for impairment. Impairment was tested by comparing the carrying value of each asset to its fair value (see table 2). The carrying value of marketable securities as of June 30th was $4,500,000. The current fair value of marketable securities was found to be 4,565,000, a positive difference of$ 65,000.
Changes in marketable securities are reported even without impairment, thus an adjustment was made (see table 3). The carrying value of the mountain division as of June 30th was $12,360,000. The current fair value was found to be $9,625,000. An adjustment of $2,735,000 was made. The carrying value of the lodge as of June 30th was $9,500,000 and the fair value was found to be $11,355,150. No impairment was recognized. The carrying value of real estate was $16,500,000 as of June 30. th and the current fair value was found to be $13,890,000.
No adjustment was made because the undiscounted cash flows from the real estate division equaled $22,800,000 and was valued higher than the carrying value (for all adjustment entries refer to table 3). To test for impairment to good will the fair value of $41,000,000 from the valuation given was compared with the purchase value of$ 46,050,000. The negative difference of $5,050 suggested some impairment and failed step 1. Therefore, it was necessary in step 2 to compare the new computed fair value of all assets equal to $38,329,826 to $41,000,000 (see table 1).
Please note that the difference of$ 2,670,174 represents the newly computed goodwill of Snowy Ridge Ski Resort. Thank you, Kate Smith Table 3 Snowy Ridge Balance Sheet June 30th, 20X0 Description| Unadjusted| Adjusted| Level Categorization| Cash| 540,000| 540,000| | Investment in Marketable Securities | 4,500,000| 4,565,000| 1| Land (Real Estate Division)| 16,800,000| 16,800,000| 2| Special Use Permit| 5,000,000| | | Lifts and Infrastructure| 7,360,000| | | Mountain Division| | 9,625,000| 2| Lodge| 9,500,000| 9,500,000| 2| Goodwill| 4,000,000| 2,670,174| | | | | |
Total Assets| 47,700,000| 43,700,174| | | | | | | | | | Accounts Payable| 150,000| 150,000| | Bank Loan | 1,500,000| 1,500,000| | | | | | Total Liabilities | 1,650,000| 1,650,000| | | | | | Capital Investment| 46,500,000| 46,500,000| | Other Income | | 65,000| | | | | | Retained Earnings | -450,000| -44,679,826| | Equity | 46,050,000| 41,885,174| | | | | | Total Liabilities/Equity| 47,700,000| 43,700,174| | | | | | Table 1 Fair Valuation Table| | | | Asset| Valuation Approach| Level | Fair Value| Marketable Securities| Quotable| 1| 4,565,000| Mountain Division| Market Approach| 2| 9,625,000|
Lodge Division| Income Approach| 3| 12,040,548| Lodge Division| Market Approach| 2| 11,355,150| Real Estate Division| Market Approach| 2| 13,894,675| Impairment Table| | | | | | | | | | | | Asset| Carrying Value | Undiscounted Cash Flows| Recoverable? | Fair Value| Adjustment| | | | | | | Marketable Securities| 4,500,000| | | 4,565,000| 65,000| Mountain Division| 12,360,000| | Yes| 9,625,000| 2,735,000| Lodge Division| 9,500,000| | | 11,355,150| N/A| Real Estate Division| 16,800,000| 22,800,000| Yes| 13,894,675| N/A| | 43,160,000| | | | | | | | | | | Table 2