Assume that upon inquiry, you learn the following about Wasatch’s second investment, the Broadcast License. Read the information below, then answer the questions.

During the meeting, Mr. Bigfet also informs you that Wasatch, Corp. acquired a new business, Borealis Company effective December 31, 20X0, valued by a specialist using an income method, discounted cash flow technique. Borealis was a major competitor in the Great Northwest Territory and the broadcast license was their primary asset. When you ask what Wasatch is doing with this asset, Mr. Bigfet says that when they purchased Borealis, he had hoped to use this broadcast license to further gain market share in another part of the world. But, recently, has says, they have decided not to pursue broadcasting in this market. Mr. Bigfet also says that they have not examined the broadcast license for possible impairment.

Further investigation revealed that Wasatch Corp purchased the intangible asset, which gives it broadcasting rights in the future. When acquired it was determined that the broadcasting rights result in cash flows of $5,000,000 at the end of each year for the next seven years. The risk-free interest rate is 4%; the receipt of these franchise cash flows is not certain, so a 10% risk- adjusted rate is determined specific to this franchise.

In addition, you remember reviewing the compensation contracts of key employees and you know that the last thing Mr. Bigfet needs is an asset impairment loss that would keep him from getting his bonus this year. However, you have read a recent article in The Economist that indicates the Great Northwest Territory has entered a recession due to global warming and there may not be much market share left as people are moving elsewhere.

Wasatch Questions:

1. Describe the nature of the asset. Do you agree that it is a financial asset? If not, what type of asset is it?
2. What is the RMM for this asset?
3. What approach is management using to estimate the FV of this asset? What level in the input hierarchy are they using?
4. What audit testing approach should the auditor use to test the valuation of this asset – summarize the specific procedures the auditor should perform.
5. What are the significant inputs & assumptions with this asset that need to be evaluated? For each input or assumption, summarize the procedures the auditor could perform to audit these.
6. What issues or concerns do you have with management’s valuation approach or assumptions used?