Financial Reporting Valuations
- Purchase Price Allocation
When your company is on the buy-side of an acquisition, you are burdened with the responsibility of reporting all items related to the transaction in your financial statements. ASC 805 requires that purchase price allocations be determined by recognizing the costs of acquisitions and liabilities as tangible assets, separately recognizing intangible assets at fair value. Allocation of the purchase price both for financial reporting and for tax purposes is inevitable in business acquisitions.
- Goodwill impairment testing
ASC 350 requires that after the initial recognition of goodwill and other intangible assets through a business combination or other acquisition, these assets be periodically tested for impairment. These impairment tests are the result of ASC 805 which prohibits the pooling of interest and eliminated goodwill amortization.
Under U.S. GAAP, goodwill impairment testing is conducted at the reporting unit level. The process is to identify potential impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying value, there is no goodwill impairment. If there is a goodwill impairment, the implied fair value of goodwill is compared to its carrying amount. An impairment loss is recognized for the difference if the carrying amount of goodwill exceeds its implied fair value.
- Intangible Assets
An intangible asset lacks physical properties and represents either legal rights or competitive advantages; these assets can be developed or acquired by an owner. Intangible assets may consist of copyrights, trade secrets, patents, trademarks, etc., representing a competitive advantage of knowledge activities and know-how. A valuation is necessary when determining the value of an intangible asset.