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1 August 31, Working Group 2 Customer Related Assets c/o Paula Douglas Seidel The Appraisal Foundation th Street, NW, Suite 1111 Washington, D.C Dear Group Members: This letter is in response to the exposuree draft of The Valuation of Customerr Related Assets. The American Institute of Certified Public Accountants (AICPA) is a professional organization of approximately 380,000 certified public accountant (CPA) members. Our constituency actually exceeds that number. That is because, under various state accountancy laws, AICPA professional standards also encompass practicing CPAs who are not AICPA members. The forensic and valuation services executive committee (FVSEC) is a senior technical committee of the AICPA. The FVSEC is empowered to issue valuation standards for our members and to comment on valuation-related topics on behalf of the AICPA. This letter presents our comments with regard to the June 5, 2012, first exposure draft of The Valuation of Customer-Related Assets ( VCRA ). Specific Question Number 1 (page 9); Are there circumstances where the customer contracts and related renewals should be recognized and measured as two separate assets? The FVSEC believes these assets are one in the same. The customer contracts are what lead to thee customer contract renewals. The FVSEC does not believe that a buyer of the customer contracts wouldd view the expected contractt renewals as a separatee asset that they are buying at the date of purchase. Thee buyer typically expects either that the renewals will happen or will not happen, and would factor that expectation into the price to be paid for the customer contracts. If a contract, however, is of a nature that is distinct from the normal way that the company transactss business, one could argue that it could be a separate asset. The FVSEC also recommends that the term customer contracts and related customer relationships bee termed customer contracts and expected contract renewals. The distinction is important because thee values are different. For the customer contracts, there is less risk to the income amount and the incomee term, so a lower discount rate could be appropriate. Whereas, the expected contract renewals are moree risky because both the income term and the income amount are unknown. Lives on these are alsoo different as the life of the contract is over when the contractt term ends.. The life on the contract renewals is unknown and must be determined through estimation andd analysis off historical renewals.

2 The FVSEC recommends that all of these factors should be mentioned in The Valuation of Customer- Related Assets. Specific Question Number 2 (page 22): Should the assessment of economic lives of customer relationships include consideration of post-acquisition efforts and their effect on customer buying patterns, or should very low projected attrition imply very long customer lives in all cases? In other words, should the valuation specialist consider factors other than observed or projected attrition when determining customer lives? The FVSEC believes that all factors pertinent to a market participant should be factored into the valuation of a customer-related asset. These factors could include post-acquisition efforts if other market participants would also take those efforts into their valuation analysis. The FVSEC believes that there could be certain post acquisition efforts that should be accounted for through the income forecast and/or discount rate estimation rather than through the customer attrition rate and life analysis. For example, if a market participant plans to increase prices on day two for specific products and that market participant believes that some attrition would occur as a result, this expectation should be taken into account in the income forecast (volume/price changes) as long as other market participants would do the same. Historical attrition reflects historical data that is known and can be quantified. Market participants often rely on (somewhat analogous to usage of historical volatility as a proxy for measurement date volatility in an options valuation) historical attrition statistics to form expectations about future attrition at the measurement date. The FVSEC believes that it would be inappropriate to subjectively change the attrition rate for upcoming events that are not known or knowable. The FVSEC believes that when attrition attributes are used that are contrary to historical attrition studies, the analysis will receive a higher degree of scrutiny when the analysis is subject to peer review, audit, or regulatory examination. The deal income forecast would need to consider such items and considerations from a market participant standpoint. The FVSEC believes that these comments and thoughts should be addressed in the VCRA in order to make it clear as to what factors should (and should not) be considered in the attrition rate and the remaining useful life calculations. Specific Question Number 3 (page 23): Should migration churn be included in customer attrition calculations? The FVSEC believes that all factors pertinent to a market participant should be factored into the valuation of a customer-related intangible asset. These factors could include migration considerations. If the target company buyer believes that customers may leave as a result of an acquisition (i.e. to work with another supplier), the valuation may factor this migration churn into the analysis (if other market participants would expect the same experience). If the buyer expects to have to incur costs to prevent customers from leaving, these costs should be factored into the valuation (if other market participants would experience the same costs). The FVSEC believes that there could be circumstances where migration both may and may not be a factor in the valuation. For instance, let s consider a competitive business environment of a cable television subscriber. The Jones family moves from its location and the Smith family moves in. The Smith family may select a different cable provider, etc. In this example, migration would be a factor. However, there are also noncompetitive business environments in which migration would not be a factor. Consider the same example, but now the service relates to the water or gas company. The Smiths would have no other choice of vendor so there is no migration to consider. No matter what the case, the historical information on customer attrition should be analyzed and may provide historical guidance on migration.

3 The FVSEC believes these factors warrant consideration and discussion in The Valuation of Customer- Related Assets. Specific Question Number 4 (page 33): What is the most appropriate discount rate for the Without Scenario? a. A higher discount rate than the With Scenario b. The same discount rate as the With scenario c. A lower discount rate than the With Scenario d. If a different discount rate is used in the With Scenario and the Without Scenario, what discount rate should be used in the Weighted Average Return on Assets (WARA) calculation in a business combination? The FVSEC believes that the with/without scenario method has become more common recently as this method provides practitioners with a way to avoid the use of multi-period excess earnings models (MPEEM). However, if the valuation analyst uses this method, the FVSEC recommends that the discount rate should depend on the measure of cash flow. If the valuation analyst believes that he/she has factored in all potential losses into the forecast in the Without Scenario, then the discount rate would be the same as in the With Scenario. The Without Scenario should include all potential loss and thus, there is no perceived higher risk to account for. When different discount rates are used, a problem may be caused. That is, the valuation analyst has to determine what rates should be used to calculate the tax amortization benefit (TAB) and the WARA. The FVSEC believes that because of these issues, it is more common for the analyst to consider all scenario differences in the cash flow projections. This procedure allows the use of the same discount rate used in the two scenario analyses. Specific Question Number 5 (page 34): Should contributory asset charges be considered for all contributory assets or only those for which income stream cannot readily be identified, such as fixed assets net working capital, or the assembled workforce? The FVSEC believes that the Differential Method has become more common recently as this method provides practitioners with a way to avoid the use of MPEEMs. However, if the analyst uses this method, the FVSEC recommends that all contributory charges should be applied. Consider the example presented on page 35 of the VCRA. The lost customers revenue in year one is $1,000. The FVSEC believes that a charge for all contributory assets should be deducted, including intangible assets that have an income stream. Intangible assets such as trademarks, patents, etc. should be considered because, without these contributory assets, a market participant would not expect $1,000 in revenue or $228 in net income. The VCRA states that the basis for excluding a charge for income-producing contributory assets is that the PFI,..isolates the economics lost in absence of the existing customer relationship asset. However, the PFI assumes that all other assets required are in place. Thus, presumably, the PFI includes revenue associated with the income-producing contributory assets. The exclusion of a contributory asset charge does not seem to be part of common practice. Also, the differential method is virtually the same as the with/without method and in the with/without method all assets aren t all contributory charges considered? Why is the differential method different? The FVSEC recommends that the VCRA combine the with/without method and the differential cash flow method into one method and believes that all contributory assets should be considered.

4 Specific Question Number 6 (page 37) Should the cost approach be tax-affected in which case it would be adjusted for TAB) or not? If there is more than one type of key input (direct cost, indirect cost, developer s profit, and opportunity cost) reflected in Cost Approach, does the answer differ for each input? The FVSEC believes that there are differing views on this topic. This is because there are differing thoughts in valuation profession as to what constitutes cost approach valuation methods. For example, the FVSEC believes that the replacement cost new less depreciation (RCNLD) method is a very common method under the cost approach. In estimating the RCNLD, the asset is assumed to be replaced by either a make or a buy analysis. Obsolescence is then applied to the replacement cost new (RCN) estimate. Some believe that the RCNLD also includes lost income (i.e. an opportunity cost) during the replacement intangible asset s development period. Whatever the case, the FVSEC believes there is no tax amortization benefit to consider in this method because it is premised on the all-in cost today to replace an asset. The RCNLD method is different from the cost savings method. In the cost savings method, expected future costs are saved over a period of time and are discounted to present value. There is confusion as to which valuation approach encompasses the costs savings method. That is, the cost savings method has elements of both the cost approach and the income approach. The general consensus is that since the cost savings method forecasts actual expenses saved and then discounts those to present value, that this method is more part of the income approach. As part of the income approach, the cost savings method would include consideration of income taxes and of the TAB. The FVSEC recommends that these points should be discussed in the VCRA in order to reduce the confusion within the profession regarding this method. If and only if the asset qualifies as a Section-like 197 intangible asset in the transaction should the valuation analyst adjust for the TAB. The FVSEC believes that the selected valuation methodology and circumstances will dictate whether or not tax affecting is appropriate. The VCRA guidance should be clear as to what factors the analyst should consider in the application of the TAB. Specific Question Number 7 (page 42) Under what circumstances should the cost Approach be employed to value customer related assets? The FVSEC believes that there are cases where the customer related assets are valued under the cost approach because they are not the primary assets to an acquisition. In such cases, the asset needs to be valued using a method other than the MPEEM. However, the FVSEC believes the cost approach is less commonly applied compared to the income approach or the market approach. Such situations include instances (such as early-stage enterprises) where prospective financial information is not available to perform an MPEEM or other income approach method. However, if the cost approach is applied, the FVSEC recommends that it only be used when 1) the analyst does not have sufficient data to perform the market approach, 2) the analyst does not have sufficient data to perform the income approach, 3) the analyst has RCN data, 4) the analyst has reliable obsolescence data, and 5) the analyst has remaining useful life data. The FVSEC recommends that these factors are imperative to have in order to effectively apply the cost approach, and the VCRA should state so accordingly. Specific Question Number 8 (page 44) Should an income-based customer relationship model be adjusted if the company has a deferred revenue liability on the balance sheet? If so, which view do you feel is most

5 appropriate (A, B, C, or D in the exposure draft)? What other views exist regarding how to adjust for deferred revenue consideration? The FVSEC believes a View E needs to be included. View E would be presented as follows: 1. The deferred revenue liability (equal to fulfillment cost + normal profit margin) will be recognized as revenue and the fulfillment costs will be deducted in the period in which the obligation is fulfilled. Therefore, the acquirer will recognize post-acquisition profit associated with the deferred revenue equal to the normal profit margin on fulfillment. 2. If deferred revenue is excluded entirely from the customer valuation, then there will be no corresponding intangible asset related to the deferred revenue that will be amortized against the post-acquisition profit on deferred revenue, which is inconsistent with the treatment of other contract-based intangible assets. In addition, while there is no cash inflow related to the acquired deferred revenue, the acquirer s satisfaction of the performance obligation satisfies a liability and prevents a cash out-flow back to the customer for non-performance. Thus, consistent with revenue recognition for the acquired deferred revenue, the revenue is actually earned as the performance obligation is fulfilled by the acquirer. 3. Therefore, acquired deferred revenue should be included in the customer revenue forecast as it is expected to be earned (at fair value). Fulfillment costs should also be included. As a result, the post-acquisition profit will be included in the relationship valuation and will be amortized against the post-acquisition profit on deferred revenue. As a result, there is no double-counting or netting on the balance sheet and the amortization is correctly matched to the profit, consistent with other contract-based intangibles. Revenue in the PFI should be on an accrual basis, including future deferred revenue. 4. Consistent with A/R, inventory, A/P and accrueds, since deferred revenue is a recognized on an accrual basis in the PFI, it should also be included in working capital for purposes of calculating the contributory asset charges. The effect of including deferred revenue is to reduce the overall charge for net working capital, which accounts for the timing of the deferred revenue cash flow (i.e. it is paid in advance). This proposed view is closest to the VCRA View D with regard to treatment of the acquired deferred revenue. The only difference being that under the proposed View E, the normal profit on fulfillment of the acquired deferred revenue would be included in the CR valuation and the associated CR amortization would net against the related normal profit recognized in the acquirer s income statement. Under View D, the acquirer would recognize the normal profit in its income statement with no related intangible asset amortization. Aside from acquired deferred revenue and in contrast to VCRA View D, the proposed View E above proposes that revenue be kept on an accrual basis for future deferred revenue and that deferred revenue be included in working capital on a book value basis for CAC purposes. The FVSEC believes that View B (and for that matter A and C) are inappropriate for of the following reasons: 1. The CR value would include fulfillment expense on acquired deferred revenue without the associated revenue. Thus, the liability associated with the acquired deferred revenue fulfillment cost is being included on the balance sheet twice. It is included (a) as a reduction in the value of the CR asset, and (b) as a component of the deferred revenue liability. 2. Excluding the deferred revenue from the CR PFI would ignore the fact that the acquirer is earning the revenue by satisfying the acquired deferred revenue performance obligation and relieving the associated liability. From the acquirer s standpoint, earning the revenue and preventing a cash outflow for the acquired deferred revenue is economically identical to cash inflow from other revenue.

6 3. It appears that the task force is saying that accrual based revenue would be adjusted to a cash basis for all deferred revenue, including acquired and future (i.e. changes in forecasted deferred revenue would be netted against the accrual based revenue). All four views propose this adjustment. This is inconsistent with the treatment of other accruals (A/R, A/P, etc.). It is also inconsistent with the fact that although the cash for deferred revenue has been received, it has not yet been earned, thus there remains a performance obligation. In addition, the VCRA does not address whether working capital would include deferred revenue for CAC purposes. The FVSEC believes this is a significant issue to discuss in the VCRA given there is a wide diversity of practice regarding the deferred revenue liability. General Comments: The FVSEC believes the exposure draft is very well written. We commend the Group on issuing it for comments. Some general comments are as follows: 1. An example of the Distributor Method would be helpful given that it is new and not widely known. The other methods have examples that help to visualize the concepts, but the Distributor Method was not included; 2. We recommend any words that seem authoritative be removed. For example the word should. In many places the document reads that the analysis SHOULD do this or that. This can be interpreted as authoritative. We recommend using words like may or it is recommended. 3. We recommend excluding paragraphs and These seem to be more of an overall reconciliation in accordance with ASC 805 as opposed to dealing directly with the valuation of customer related assets; 4. Paragraphs 4.4.4, , 8.1.9, and , as well as line numbers 221, and 1182 need to be adjusted (the last lines are spread out); 5. The FVSEC believes there is some language in the document that is suggestive that the customer asset would qualify as an asset grouping under ASC 360. We ask that you look into this. 6. There needs to be a reconciliation and clarification between the white paper and the previously issued white paper on contributory asset charges where there is overlap and ambiguity. For example, the issue of inventory step up/down and the impact on PFI and by extension the valuation of certain intangibles. Another example could be deferred revenue. 7. The FVSEC recommends changing the term customer contracts and related customer relationships to customer contracts and expected contract renewals. 8. The FVSEC recommends substituting the phrase three generally accepted approaches for the phrase three standard approaches. (page 13) 9. The FVSEC recommends a literature citation for the name Distributor Method. The FVSEC does not think the name is commonly used in valuation or accounting literature. The FVSEC believes it is more commonly called the profit split method or the comparable profit method. 10. The FVSEC believes that the With and Without Method and the Differential Cash Flow Method are one in the same. We recommend they be described as one method. 11. The FVSEC recommends changing the wording on page 14 The Market Approach is rarely used for the valuation of customer-related assets The Market Approach is used routinely to value assets such as bank core depositors, loan customers, credit card customers, newspaper subscribers, etc. The VCRA should consider these applications. 12. The FVSEC believes the documents would flow better if all income approach methods were first described conceptually and then present the detailed procedures related to all the income approach methods. 13. The FVSEC recommends guidance be given in the VCRA on the timeframe in which projected income for customer-related assets is done. For instance, do you project the income over the average remaining life or the customer total life? The results of these could be materially different. As a quick example, what if the average remaining life per the retirement method is 10 years and the total life is 20 years. What do you consider and use?

7 14. On page 21, the FVSEC does not believe there are four methods. There are two methods (i.e. the retirement rate method or the management estimate) to achieve two alternative life estimates (i.e. the revenue attribution or the number of customer attrition rate). 15. The FVSEC believes that the language around the TAB as it relates to the income approach and that it should be added to every income approach be clarified. Not for profit hospitals do not have deferred tax accounts and such accounts are not being netted against the intangible asset value in the FV valuation. 16. On page 26, the distributor method is a subset of thee profit split method or the comparable profit method, not the MPEEM. Typically theree is no ROI procedure in the distributor method. 17. On page 31 and 32, both the with/without scenarios doo not include charges for contributory assets whereas in the example on page 35, contributory charges are deducted appropriately using the conceptually identical differential cash flow method. 18. On page 36, the direct and indirect costs descriptions are incorrect. The classification is not an allocation issue as described. Rather direct costs include material, labor, and overhead internal to the organization developing the customers, patents, trademarks, etc. Indirect costs are fees paid to external organizations to develop the intangible asset. 19. The FVSEC believes the cost approach description andd example on page 36 and 37 have a glaring oversight. They both exclude consideration for obsolescence. Value is RCNLD. Value is not RCN. In particular, customer relationships are typically affected by economic obsolescence (due to age/life of relationships of the customers). Finally, we thank the Group for its consideration of our comments, and for its continued service to the valuation profession. Very truly yours, Thomas Burrage, CPA Chair Forensic and Valuation Services Executive Committee