Purchase Price Allocation (ASC 805)
To comply with generally accepted accounting principles (GAAP) for financial reporting purposes, an acquirer needs to report the specific types and associated fair values of the acquired tangible (monetary and non-monetary), and intangible assets. These fair values are included on the opening post-acquisition balance sheet and are periodically adjusted to reflect depreciation and amortization charges, which reduce the carrying value of the associated asset.
Intangible assets that are not amortized, such as goodwill, must be tested for impairment on at least an annual basis. Impairment is indicated when fair value is less than carrying value as of a given impairment testing date, or when other circumstances suggest the presence of impairment, such as a downturn in the entity’s business that is not considered to be temporary.
There are three basic steps in a purchase price allocation, whether for financial or tax reporting purposes. First, the total purchase price must be determined, inclusive of cash and non-cash consideration. To the degree that the acquirer is assuming certain liabilities, whether stated or contingent, these must be properly considered in the calculation of the effective price paid for the acquired assets.
The second step is to identify the types of tangible and intangible assets acquired that meet the criteria for recognition under the relevant accounting and tax reporting guidelines. In the case of intangible assets, the main criterion is whether it is to be recognized as an asset separate and apart from goodwill.
The third step is to value the identified assets that meet the relevant reporting criteria, using, as appropriate, the cost, market, and income approaches.