The Strategic Value of Third-Party Valuations: A CFO's Decision Guide Amid FASB Rule Changes

As the Financial Accounting Standards Board (FASB) studies replacing the annual goodwill impairment test with a straight-line amortization model, financial institutions and other companies face two pressing choices:

• Should they continue to perform regular reporting unit valuations, even if these valuations are no longer required as part of the impairment testing process?
• If they continue, should these valuations be performed by a third party?

Here are our recommendations on how CFOs can successfully navigate these issues.

The strategic value of valuations

If impairment testing is replaced by amortization, many CFOs may instinctively abandon annual reporting unit valuations and redirect resources to other strategic priorities. However, at a time when the strategies of financial institutions and other companies are being disrupted by accelerated digital transformation, new competition, and heightened stakeholder scrutiny, we believe this could be a mistake.

As recent surveys by Ernst & Young LLP (where we serve as principal and senior manager, respectively) show, most CFOs recognize that well-informed, unbiased quantitative value analysis can provide actionable intelligence for decision-making.

Our survey of 51 corporate and regional CFOs at financial institutions with multiple reporting units found that 53% plan to continue performing annual valuations even if not required, while only 29% said they would not perform the process, and 18% were undecided.

The question is, are they getting as much value as possible from their valuations?

When fully utilized, regular segment valuations can form the basis for assessing forecasts, challenging growth rates, understanding competitive positioning, and measuring reporting units relative to other internal units and competitors.

In our survey, 75% of CFOs said they rely on valuations to informstrategicdecisions; 63% use valuations to assess the health of individual business lines.

Less encouragingly, only 25% of CFOs report using valuations to understand whether their stock is overvalued or undervalued, and fewer than half use valuations to guide capital allocation decisions.

After years of abundant liquidity, in today's competitive environment, misallocated capital can lead to adverse consequences. Regular sum-of-the-parts valuations can help distinguish which businesses have prospects that should receive priority access to internal capital and which may be candidates for fix-sell-close.

The benefits of third-party valuations

In our survey, 60% of companies that perform valuations internally acknowledge skill and information gaps that may prevent them from extracting maximum value from the valuation process.

In contrast, third-party valuation practices that work with other companies have valuation experience across cycles and can understand industry trends in a more actionable way.

As advisors, these firms can leverage their expertise in environmental, social, and governance (ESG), cryptocurrency, ecosystem partnerships, and other emerging strategic areas to help C-suite leaders navigate ongoing digital transformation.

Due to a lack of vested interest, third parties can assess business performance without bias. For example, they can identify whether a business is using overly optimistic forecasts to attract disproportionate internal capital, or identify growth areas where the company is underinvesting relative to peers.

Ideally, a third-party valuation firm can become a trusted advisor to the CFO, providing honest assessments of which strategic levers are most likely to improve performance, while helping the CFO navigate evolving investment priorities.

It is well known that many CFOs struggle to keep pace in a rapidly changing digital environment, even as they are expected to make critical investment decisions. Third parties can answer questions that may be uncomfortable for subordinates or peers to raise.

Most CFOs plan to continue using valuations as a tool for informed decision-making, regardless of the FASB's decision. To fully leverage valuations, support from a trusted third party is needed.

The views expressed in this article are solely those of the authors and do not necessarily represent the views of Ernst & Young LLP or other members of the EY organization. The authors, EY, or any of its member firms assume no responsibility for the content, accuracy, or security of any third-party websites linked to or otherwise referenced in this article.