Valuations for Financial Reporting under FASB ASC 805

A purchase price allocation (PPA) is an accounting methodology used when one company (the acquirer) purchases a second company (the target), and the purchase price is allocated into the assets and liabilities acquired from the transaction. A PPA is conducted in accordance with the Financial Accounting Standards Board’s (FASB) rule ASC 805. In general, FASB ASC 805 applies to all transactions or other events in which an entity obtains control of one or more businesses, including those deemed mergers of equals.

ASC 805 requires that all identifiable tangible and intangible assets acquired be assigned a portion of the purchase price based on their fair values (FV). FV is defined as the amount that would be exchanged in the sale of an asset or transfer of a liability in an orderly transaction between market participants at a specified date. Tangible assets include such items as land, site improvements, buildings, and tenant improvements. Under intangible assets are such items as existing leases (above or below market value), tenants in place (vacancies), trademarks, Internet domain names, customer lists, copyrights, and licensing and royalty agreements.

What is the role of the appraiser in all this? Before an acquisition transaction can be completed, the target must appraise the assets and liabilities being acquired to determine their FV. The purchaser hires an appraisal firm which is charged with reporting the FV. Typically, the purchase price will exceed the FV of these assets and liabilities, resulting in goodwill. This occurs because the acquirer expects to create value through their handling of the target, which in turn gives the target the opportunity to increase their selling price.

ASC 805 is rather complex and demanding, and companies are turning to valuation professionals to properly assess both tangible and intangible assets for purchase price allocations. Since 1990, RD Clifford Associates has been a leader in such work for a wide range of clients nationwide. Our expertise, attention to detail, and accurate valuations are what we consistently provide to our clientele.