Purchase Price Allocations

A fundamental requirement associated with today’s business combinations is acquisition accounting, which is addressed under Accounting Standards Codification Topic 805 (formerly SFAS 141R). ASC Topic 805 outlines how acquirers recognize and measure the identifiable assets acquired, liabilities assumed, and goodwill acquired in a business combination.

The essence of a purchase price allocation involves identifying the acquired assets and assumed liabilities, determining the fair values of each, and allocating the determined values on the balance sheet. Goodwill is determined via a residual method; specifically, the excess consideration beyond that applied to the identified assets is allocated to goodwill. MPI has significant experience valuing the following types of assets:

More complex issues under the current rules involve negative goodwill situations, the valuation of earn-out payments, other contingencies, non-controlling interests, and equity consideration.

For certain companies and situations, the new accounting rules have increased the importance of pro forma analyses. Transaction planning might include identification of assets and liabilities for accounting purposes, estimating annual amortization expense based on preliminary values, and developing pro forma allocations for financial statements.

The accounting rules governing acquisition accounting are complex and generate a number of unique valuation needs. Financial managers should strongly consider hiring an independent appraisal firm to assist in maintaining compliance with the maxims of ASC Topic 805.