If you are purchasing a business, AccuVal’s expertise at estimating the “fair values” of all identifiable tangible and intangible assets establishes the basis for depreciation and amortization after the transaction closes. We recognize that an important factor in the efficient and accurate execution of these engagements is upfront and proactive communication with you and your external auditors. We work to immediately identify the material assets that need to be appraised, confer with your auditors regarding methodology and meet critical deadlines.
What is a purchase price allocation?
In an effort to bring consistency and transparency to business combinations, the Financial Accounting Standards Board (FASB) set forth very specific rules governing how these transactions must be accounted for under ASC 805 (Formerly SFAS 141R). It mandated that the total purchase price be allocated among all major assets and liabilities in proportion to their fair value, a purchase price allocation, and that a universal method of accounting be utilized to do this − called "the acquisition method".
AccuVal helps acquirers ensure the allocation of purchase price meets regulatory approval by providing independent appraisals that meet the stringent review of auditors and the SEC.
How are purchase price allocations performed?
First, AccuVal’s team seeks to understand the circumstances surrounding the acquisition to confirm that the event is, in fact, required to abide by FASB pronouncements. The target company, acquirer, acquisition date, book value and purchase price are identified, and rationale for the transaction is disclosed.
Once it is confirmed that the acquisition does require a purchase price allocation, AccuVal turns toward identifying all property, plant & equipment and all identifiable intangible assets and verifies that these assets meet the recognition criteria set forth by FASB. The team then moves to the most critical step in purchase price allocations – determining fair value. This technical phase requires a high degree of valuation acumen. Appraisers examine the market to determine the price that would be paid in an orderly transaction between market participants. It assumes an active market with knowledgeable and unrelated parties. But this process can be more complicated when there is not an active market to reference. In those instances, AccuVal abides by the guidelines set forth in FASB’s fair value hierarchy.
If the purchase price is greater than the fair value of net assets acquired, the remaining amount is recorded as goodwill which is tested annually for impairment according to ASC 350 (Formerly SFAS 142). All financial reporting considers the definition of Fair Value as laid out in ASC 820 (Formerly SFAS 157). If the purchase price is less than the fair value of net assets acquired, a gain from the transaction is recorded. AccuVal includes a narrative explaining the rationale behind either scenario in the allocation of purchase price analysis.
Why are purchase price allocations important?
According to FASB, the intent of this requirement is to better reflect the investments made in an acquired entity, improve the comparability of reported financial information and provide more complete financial information. Purchase price allocations also establish the basis for depreciation and amortization allowance.
An acquirer may obtain control of an acquiree in a variety of ways such as:
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