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Purchase Price Allocations

Purpose: Tangible and intangible assets must be valued to ensure proper financial reporting and income tax treatment after a business combination.

The authority on purchase price allocation for financial accounting purposes under Generally Accepted Accounting Principles (US GAAP) is Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805: Business Combinations. 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 may provide evidence of proper compliance.

An intangible asset shall be 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:

  • Technology-based Intangibles
    – Developed Technology
    – Patents and Trade Secrets
    – In-process Research and Development
  • Trademark/Trade Names
  • Customer-related Intangibles
    – Customer Relationships
    – Customer Lists
  • Non-competition Agreements
  • Assembled Workforce
  • Contract-based Intangibles
    – Licensing/Royalty Agreements
    – Leases and Supply Agreements not at Market

For income tax accounting purposes the Internal Revenue Code (“IRC”) §1060 dictates the provisions for intangible assets acquired as part of the lump sum purchase. IRC §1060 requires that the seller and purchaser each allocate the consideration paid or received in the transaction among the assets transferred in the same manner as amounts are allocated under IRC §338(b)(5).

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