Purchase Price Allocations
Purchase Price Allocations: Can We Do This In-house?
Early in my career, I was often asked to assist auditors with reviewing in-house valuations of intangible assets acquired in business combinations. I often responded to these requests with a sigh. Many individuals believe they can put together an intangible valuation based on seeing a sample valuation or updating a previous valuation. After all, many CFOs and controllers are skilled in valuing firms, building financial models, and understanding intangible assets. However, Auditors often require stringent documentation and support for all assumptions applied in ASC 805, and it is difficult to obtain access to the resources and databases, much less keep up with documentation requirements.
Why Valuing Intangible Assets Requires Depth of Expertise
What CFOs and controllers may not realize is that the work required to value identifiable intangibles is quite academic and relies on evolving best practices that are continually being developed by thought leaders in the profession. Even within the valuation profession, you will find two types of practitioners; those who perform purchase price allocations and those who do not. This is because the area of financial reporting has become so unique and specific that it is not worth keeping up to date unless you do a substantial amount of work in this area.
There are instances where performing an intangible asset valuation in-house seems like a reasonable option. Under the Private Company Counsel guidance (ASU 2014-18), firms can elect to simplify their purchase accounting. If this election is made, a company no longer must recognize non-competition agreements or customer-related relationships, which are not capable of being licensed or sold from other assets of the business. Choosing this election may result in instances where the only identifiable intangible asset being placed on the opening balance sheet is a trade name. We have found that even in instances like this, there are enough inputs and nuances that need consideration and adequate support that companies find it much more efficient to engage a third party to perform their analysis.
Should You Perform an Analysis In-house?
Some questions that need to be asked before determining whether to perform an analysis in-house are:
- How many reporting units will there be?
- What identifiable intangible assets exist?
- Will ASU 2014-18 be elected?
- Was contingent consideration issued as part of the purchase consideration?
- Was rollover equity part of the purchase consideration?
- How will the positions and approaches taken in this valuation affect future financial statements?
The Most Important Question to Ask
While all of the questions above are important, the most important question to ask is, what does my auditor require? While best practices are quickly becoming solidified, we have found that different firms have different expectations. These differences relate to the risks determined by the audit team and the audit firm’s accounting policies. Understanding the auditor’s expectations before making a decision is critical.
Guidance To Go Forward
We have created the Valuation Financial Reporting Center to help assist companies in complying with the fair value requirements of U.S. GAAP. The resources found on this site should assist those looking to perform a financial reporting valuation in-house or to better understand the financial reporting requirements. If you have questions, please contact us to discuss your unique situation.
For More Information
Contact Andy Clausen with your specific questions or to begin a conversation about the right level of compliance, communication and efficiency needed to achieve your valuation goals.
Contact Us
Contact DSB Rock Island today to learn how we can recommend the best accounting software for your needs to save time and money as you grow your business. Our responsive and proactive advisors are ready to help you take the next step.
Purchase Price Allocations: Can We Do This In-house?
Early in my career I was often asked to assist auditors with reviewing in-house valuations of intangible assets acquired in business combinations. I often responded to these requests with a large sigh. Having been through this process before I knew many CFOs and controllers believed they could put together an intangible valuation. After all, many CFOs are skilled in valuing firms and building financial models.
Why Valuing Intangible Assets Requires Depth of Expertise
What CFOs and controllers did not realize is that the work required to value identifiable intangibles is academic in nature and relies upon many best practices that have been developed over time by a select group of individuals. In fact, within the valuation profession you will find two types of practitioners; those who perform purchase price allocations and those who do not. This is because the area of financial reporting has become so unique and specific that it is not worth keeping up to date on unless you do a substantial amount of work in this area.
That being said, there are still instances where performing an intangible asset valuation can be done in-house. Under the newly issued Private Company Counsel guidance (ASU 2014-18), firms can elect to simplify their intangible accounting. If this election is made, a company no longer has to recognize non-competition agreements or customer relationships, which are not capable of being licensed or sold from other assets of the business. Choosing this election will result in instances where the only identifiable intangible asset being placed on the opening balance sheet is a trade name. In instances such as this, we see little reason to engage a valuation professional to perform this work.
Should You Perform an Analysis In-house?
Some questions that need to be asked before determining whether to perform an analysis in-house are:
- How many reporting units will there be?
- What identifiable intangible assets exist?
- Will ASU 2014-18 be elected?
- Was contingent consideration issued as part of the purchase consideration?
- Was rollover equity part of the purchase consideration?
- How will the positions and approaches taken in this valuation affect the future financial statements?
The Most Important Question to Ask
While all of the questions above are important, the most important question to ask is, what does my auditor require? While best practices are quickly becoming solidified, we have found that different firms have different expectations. These differences relate to the risks determined by the audit team and the audit firm’s accounting policies. Understanding the auditor’s expectations before making a decision is critical.
Guidance To Go Forward
We have created the Valuation Financial Reporting Center to help assist companies in complying with the fair value requirements of U.S. GAAP. The resources found on this site should assist those looking to perform a financial reporting valuation in-house or to better understand the financial reporting requirements. If you have questions, please contact us to discuss your unique situation.
For More Information
Contact Andy Clausen with your specific questions or to begin a conversation about the right level of compliance, communication and efficiency needed to achieve your valuation goals.
Contact us
Don’t wait until you reach a critical fork in the road before enlisting the guidance of a trusted financial professional. Let’s discuss how DSB Rock Island can help you navigate the business sale process every step of the way and help you reach your intended destination. Contact us today.
