Business Combinations and Purchase Price Allocations
Financial reporting rules regarding the recognition and measurement of acquired assets and liabilities are not straightforward – they require skill, expertise, and experience to correctly interpret and apply. American Appraisal is here to help. We have performed thousands of purchase price allocations for financial reporting and/or tax reporting purposes, under US GAAP, IFRS and numerous national standards.
Reporting Requirements
Financial reporting for business combinations requires a purchase price allocation in accordance with the following generally accepted accounting principles (GAAP) and tax regulations:
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FASB ASC Topic 805, Business Combinations
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FASB ASC 820, Fair Value Measurements
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FASB ASC 350, Impairment – Goodwill and Other
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FASB ASC 852, Reorganizations
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IFRS 3R, Business Combinations
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IFRS 13, Fair Value Measurement
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US Internal Revenue Code Section 1060
ASC 805 and IFRS 3R
Business combination transactions require performance of a purchase price allocation in accordance with ASC 805 (for companies reporting under US GAAP) or in accordance with IFRS 3R (for companies reporting under IFRS).
Companies must measure, at their acquisition-date fair values:
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Identifiable assets acquired
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Liabilities assumed
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Any noncontrolling interest in the acquiree
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Fair value is defined in ASC 820 and IFRS 13 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
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Fair value of the consideration transferred in a business combination is calculated as the sum of the following acquisition-date fair values:
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Assets transferred to the acquirer |
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Liabilities assumed by acquirer from former owners of the acquiree |
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Equity interests incurred by the acquirer |
Assets acquired and liabilities assumed include those arising from contractual contingencies, as well as those arising from noncontractual contingencies if it is more likely than not that the contingency gives rise to an asset or liability as defined in FASB Concepts Statement No. 6.
ASC 805 introduced significant changes over previous financial reporting standards, including changes in accounting for:
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Transaction and restructuring costs
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Contingent consideration
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Contingent liabilities
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Negative goodwill (bargain purchases)
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In-process research and development.
In addition, per US GAAP and tax regulations, acquired assets and assumed liabilities are not limited to those previously recognized by the acquiree. Certain assets and liabilities that were not previously recognized by an acquiree must be recognized by an acquirer as of the transaction closing. These typically include any intangible assets that were internally developed (not previously purchased) by the acquiree.
Assets and Liabilities
Business combinations involve all classes of tangible assets, intangible assets, and liabilities, including but not limited to the following:
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Real Property |
Personal Property and Related Assets |
Intangible Assets |
Liabilities |
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Land |
Machinery and equipment |
Trademarks |
Deferred revenue |
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Land improvements |
Furniture and fixtures |
Patented and unpatented technology |
Contingent considerations |
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Buildings |
Computer equipment |
Internal-use software |
Contingent liabilities |
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Leasehold interests |
Vehicles |
Customer relationships |
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Construction in progress |
Favorable supply agreements |
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Leasehold improvements |
Noncompete agreements |
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Licensing agreements |
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Tax Considerations
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. Internal Revenue Code Section 1060 and the Regulations under IRC Sec. 338 further identify the following seven classes of assets for tax purposes:
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Class I |
Cash |
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Class II |
Marketable Securities |
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Class III |
Market-to-Market Assets and Accounts Receivable |
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Class IV |
Inventory |
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Class V |
Assets not Otherwise Classified |
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Class VI |
Section 197 (Intangible) Assets other than Class VII Assets |
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Class VII |
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.
Why American Appraisal?
American Appraisal has provided thousands of purchase price allocations for financial reporting and/or tax reporting purposes, under US GAAP, IFRS and numerous national standards. Our consultants have extensive experience in valuing all assets, liabilities and interests involved in business combination transactions. Our involvement with task forces and groups including the FASB, the SEC, the Appraisal Issues Task Force, the Valuation Resource Group, the International Valuation Standards Council, and numerous professional societies ensures our knowledge of current financial reporting standards, practices and procedures.
Many senior American Appraisal professionals have prior working experience at the major accounting firms and have been in audit review roles themselves. As a result, we have strong working relationships with the major accounting firms and know what they expect to see when they review their clients’ purchase price allocations. Purchase price allocations performed by American Appraisal result in
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Independent, objective and supportable fair value opinions
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Clear, comprehensive valuation reports.