Purpose: To value tangible and intangible assets to ensure proper financial reporting and income tax treatment after a business combination.

The authority on purchase price allocation for financial accounting purposes is Statement of Financial Accounting Standards No. 141: Business Combinations (SFAS 141). A business combination occurs when an entity acquires the net assets that constitute a business, or acquires controlling equity interests in another entity. All business combinations must be accounted for using the purchase method of accounting. Acquiring entities shall allocate the cost of an acquired entity to the assets acquired and liabilities assumed as of the date of acquisition (based on their estimated fair values). The Securities and Exchange Commission and the Internal Revenue Service will scrutinize the allocation of the purchase price to ensure proper treatment. Independent valuations will provide evidence of proper compliance.

An intangible asset is recognized as an asset apart from goodwill if it arises from a contractual or other legal right, or if it is separable (i.e., capable of being separated or divided from the acquired entity and separately sold, transferred, licensed, rented or exchanged). Some common intangible asset categories and assets include the following:

• Marketing-related intangibles
• Contract-based intangibles
• Trademarks
• Licensing/royalty agreements
• Non-competition agreementsv
• Technology-based intangibles
• Customer-related intangibles
• Patented technology
• Customer lists
• Trade secrets
• Artistic-related intangibles
• Books, magazines