Under ASC 805, purchase price allocations account for business combinations by recognizing the costs of acquisitions and liabilities as tangible assets, separately recognizing intangible assets at fair value. During the course of every acquisition, there is an inevitable allocation of the purchase price both for financial reporting and for tax purposes.
Hypothetical scenario that requires an expert in business valuation:
A business owner seeking to diversify his operations acquires a smaller business in a related industry. The buyer wants the purchase price mostly allocated to fixed assets so he can write them off quickly. The seller of the business wants the purchase price mostly allocated to goodwill, which is taxed at a lower rate. To determine a fair purchase price allocation, it may be necessary to obtain an independent business appraiser.
Special considerations for purchase price allocation valuations:
When conducting a valuation to determine a fair allocation of the purchase price for a business, the fair market value of the underlying assets of the business is what is being valued, not the fair market value of the business itself. This is because the fair market value of the business is already known, i.e. the purchase price.
In performing a purchase price allocation, intangible assets are valued using the Fair Value premise of value as specified under ASC 805 and in accordance with ASC 350. Previously, information regarding purchase price allocation could be found under Financial Accounting Standards (FAS) 141, 141R and 142.
