How is fair value of a reporting unit estimated?

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AcadiFi · Accepted Answer

Fair value estimation typically uses a combination of three approaches, consistent with ASC 820:

1. **Income approach**: Discounted cash flow of reporting unit projections. Requires 5-10 year forecast, terminal value, and WACC specific to the unit's risk. Example: Cascade Beverages' Sparkling Water unit projects FCF growing from $45M to $78M over 5 years, terminal growth 2.5%, WACC 9.8% → fair value $610M.

2. **Market approach**: Apply multiples from comparable public companies or transactions. Trading comps might yield EV/EBITDA of 11x on $62M EBITDA = $682M.

3. **Cost/asset approach**: Rarely used for going concerns.

Analysts typically weight income and market approaches (e.g., 60/40) to get a concluded fair value. If aggregate reporting unit fair values differ materially from enterprise market cap, a reconciliation (control premium, synergies) is required.

Key judgments: discount rate selection, terminal growth, selecting comps, and projection credibility. Management bias toward higher fair values (avoiding impairment) is a known audit risk, so third-party valuation specialists are common for material reporting units.

How is fair value of a reporting unit estimated?

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