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...
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