ASC 805 Purchase Price Allocation - Business Combinations
Purchase Price Allocation is the process of allocating the Purchase Price Paid for Acquired Company to its Tangible Assets, Intangible Assets, and Assumed Liabilities.
Combinations
Tangible Assets
Real Property: Land, Land Improvements, Buildings, Leasehold Interests
Personal Property and Related Assets: Machinery and equipment, Furniture and fixtures, Computer equipment, Vehicles, Construction in progress, Leasehold improvements
Intangible Assets: Trademarks, Patented and unpatented technology, Internal-use software, Customer relationships, Favorable supply agreements, Noncompete agreements, Licensing agreements
Liabilities: Deferred revenue, Contingent considerations, Contingent liabilities
Tax Implications
Purchase price allocations performed for US tax purposes are done under the standard of fair market value, which is similar to fair value, but which also may differ in certain cases. IRS Section 1060 and Regulation under IRC Section 338 further identify the following seven classes of assets for tax purposes:
Class 1 Cash
Class 2 Marketable Securities
Class 3 Market-to-Market Assets and Accounts Receivable
Class 4 Inventory
Class 5 Assets not Otherwise Classified C
lass 6 Section 197 (intangible) Assets other than
Class 7 Assets Class 7 Goodwill and Residual Going Concern Value
These classifications are extremely important if a company is contemplating a like-kind exchange, a tax-free exchange of stock, or other corporate tax planning transactions.
Purpose of Purchase Price Allocation
Financial Reporting: ASC 805, Formerly SFAS 141r and 142
•It accurately reflect Components of a Company's Worth
•Most Intangible Assets are Amortized over their expected lives; This Expense can have a major impact on reported earnings
Valuation Process - Summary
•Determine purchase price and total asset base
•Identify components of total asset base including tangible assets, intangible assets, and remainder as goodwill
•Allocate Value to Company's Asset Components - Ultimately to the Intangible Asset Valuation
Identification of Intangible Assets
•Identification is dictated by Industry
•Trademarks/names •Customer contracts & relationships
•Technology
•Workforce
•Patents
•Databases such as customer mailing lists
•Non-compete agreements
•In-process Research and Development ("IPRD")
•Goodwill
Classifications into Categories:
•Intangible Assets Separable from Goodwill
•Intangible Assets Not Separable from Goodwill