Purchase Price Allocation & Goodwill Valuation
Comply With The Requirements Of ASC 805/IFRS3
Determining the fair value of the transaction consideration, intangible assets, liabilities, and certain tangible assets as of the date of acquisition can be complex.
An independent valuation of the business interest (or assets) acquired is needed to allocate the value of the purchase consideration to the identifiable tangible and intangible assets acquired. The residual value is attributable to goodwill, which subsequently may need to be tested for impairment. Impairment testing is performed on goodwill and other long-lived assets.
Purchase Price Allocation Process
The acquisition of a business requires an allocation of the purchase price for tax and/or financial reporting purposes. This means that the process consists of three main steps:
Calculating the
purchase price (total
consideration paid)
Identifying the correct
assets acquired and
liabilities assumed
Calculating the Fair
Value of those
assets and liabilities
Once those three steps are done, the purchase price paid for the business is then allocated among the fair values of the identifiable assets (and liabilities). The amount of the purchase price and the values of the identifiable assets is then recorded on the financial statements as goodwill.
Who will we need to get involved in this process?
Seller’s management
To get an understanding of what drives the business
Buyer’s management
To discuss what the buyer thinks it is acquiring
Buyer’s external accountants and/or tax advisors
Often, but not always
Other relevant parties
As required
How long is the Purchase Price Allocation good for? Can I just get one report and be done with this?
Once the PPA is finalized, there is generally a need for annual impairment testing of goodwill. This is a function of the status of the company.
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