December 17, 2013

Valuation Matters in Your Annual Audit: How to Get Your Year-End House in Order

By Sean R. Saari, Partner, Advisory Services

Valuation Matters in Your Annual Audit: How to Get Your Year-End House in Order

Organizing the basement…  Cleaning up the garage…  Touch-up painting… 

Every year around this time in December I spend my days off  organizing my house and taking care of various maintenance issues that I put off earlier in the year. I always like getting these tasks out of the way before the new year begins and life gets hectic at the office.

The same can be said for companies getting their financial “house” in order at year-end, tidying up before their annual financial statement audit begins during the early part of the new year. This is particularly true when it comes to valuation-related items that may need to be addressed in connection with an audit. Because the development of any valuation analysis can be a time-intensive process, getting a head-start on these items before year-end can help avoid the headaches associated with trying to get a valuation analysis started and completed once the year-end audit has already begun.

It is not uncommon for companies to put off valuation-related issues until the audit has begun or the auditors bring to attention that a valuation analysis may be necessary to support a certain area of the company’s financial statements. The most common valuation-related items that companies need to address when preparing their year-end financial statements are presented below:

Intangible Asset Valuation / Purchase Price Allocation – Did your company make an acquisition during the past year? If so, GAAP requires the valuation of any acquired intangible assets (including customer relationships, trade names, non-compete agreements and others) so that they may be separately recorded on the acquired company’s opening balance sheet. 

Stock Option / Stock Grant Valuation – Did your company issue any stock options or stock grants during the past year? If so, GAAP requires the valuation of this stock-based compensation and may require a valuation of both the company and any options that were issued.

Goodwill Impairment Analysis – Does your company have goodwill on its books? If so, your auditors may require you to perform a valuation analysis to determine whether or not that goodwill is impaired.

If your company made an acquisition, issued stock options/grants or had goodwill on its books during the past year, now is the time to get the valuation wheels in motion so that your auditors don’t require a last-minute analysis, once the audit has already begun – which may delay the issuance of the audit opinion. Talk with your auditors about the issues listed above before the end of the year and determine whether or not a valuation analysis will be necessary in order for them to issue their audit opinion; it will help save headaches down the road and allow you to have your financial “house” in order before the auditors come knocking on the front door.