Business Valuations Blog

Financial Reporting Valuations: Getting Everyone on the Same Page in Purchase Price Allocations

“Practice?  We’re talking about practice?” I doubt that Allen Iverson knew that his words would live in infamy when he discussed practice in an interview a number of years ago.  I think that many of us would disagree with the lack of importance he associated with practice – practice is the time that the head coach, his or her assistants, and the team discuss and implement strategies for their next game.  It is a time that can be used to regroup and make sure that everyone is on the “same page” moving forward.  When working through a purchase price allocation and the related accounting for an acquisition, it can be just as important to get all of the parties involved on the same page before moving forward.

When a company makes an acquisition, it is often necessary to prepare a “purchase price allocation” in which the purchase price for the target company must be allocated to all of the assets acquired (both tangible and intangible).  The valuation of the intangible assets acquired is a relatively complex process for which a third-party valuation expert is often engaged.  We have found that getting the company, the auditor and the valuation expert on the same page before the intangible asset valuation is started offers the best opportunity for a smooth process with few surprises. 

We recommend scheduling a meeting or conference call in which company representatives, the auditor and the valuation expert can discuss the acquisition together and define parameters for the following:

Intangible Assets to be Valued – Discuss and define what intangible assets need to be valued and the valuation methodologies to be used.  This helps to eliminate potential surprises later in the process.  No one wants to be in a position in which the auditor reviews the valuation report and finds that it does not include a certain intangible asset that he or she believes should have been valued. 

Materiality / Scope – Determine how significant the acquisition is to the acquirer’s existing business.  Based on the size of the purchase and its materiality in relation to the company’s overall operations, it may be possible to scale back the valuation procedures performed while still providing the auditor with sufficient audit documentation.

Timing – Determine the date by which a draft of the valuation report needs to be completed in order to give sufficient time for company management to review the analysis and for the auditors to perform their audit procedures and ask follow-up questions.  Most acquisitions are closed throughout the year, not necessarily on December 31, so get the valuation process started early to avoid the need to rush the process as well as provide cushion for potential roadblocks.

Valuation experts are becoming more and more involved in working with auditors and their clients to issue fair value opinions for financial reporting purposes.  The International Valuation Standards Council recently released and exposure draft on this very topic.  As discussed above, starting out the purchase price allocation process by getting all of the parties involved on the same page can go a long way in ensuring a smooth process with few surprises.

Interested in more information about purchase price allocations for your company? Contact our Cleveland Valuation Services by leaving a comment below, or by calling 440-449-6800.


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