Purchase Price Allocation
ASC 805 was enacted in the wake of massive balance sheet fraud. We’re here to empower investors with better financial information.
Formerly FASB 141
In an acquisition, ASC 805 (formerly FASB 141) requires that acquired intangible assets be recognized at fair value, with any excess value being allocated to goodwill. Intangible Assets are often a significant portion of the assets acquired in Merger & Acquisition transactions.
Intangible assets can be categorized into 2 groups: those with finite useful life and those with an indefinite useful life. Those with finite lives are amortized over the useful life while those with indefinite useful lives remain on the balance sheet at the original fair value, unless impaired.
Goals Of PPA
The valuation of intangible assets requires unique and nuanced financial modeling practices. As such, a PPA often receives heavy scrutiny during a financial audit. A primary goal should be to use inputs and assumptions that will be as defensible as possible in an audit.
The intangible assets acquired in an M&A transaction can be large relative to the overall balance sheet and difficult to quantify. The best practice is to engage a qualified, experienced, and independent appraisal firm for the initial ASC 805 valuation and for subsequent testing.