Asset Allocation and Intangible Asset Valuation
As industries mature, it is common for them to undergo consolidation – one company buying or merging with another. Under both GAAP or International Financial Reporting Standards (IFRS), the acquiring company must allocate the consideration paid to the assets and liabilities acquired, according to their “fair value,” and then periodically review those “fair values” for impairment. To make things even for more complicated, for a technology company much of that “fair value” may be allocated to “intangible assets,” typically patents, software code, drug compounds, product designs, or in-process research and development.
ASC 805 (formerly FAS 141R) and IAS 38
The FASB has published a new standard, ASC 805 (formerly FAS 141R), about accounting for business combinations, including the allocation of acquisition value to assets and liabilities. The International Accounting Standards Board (IASB) has a similar standard, International Accounting Standard 3 (IAS 3).
ASC 805 requires that the acquiring company determine the value of every asset and every liability, including intangibles. There are some substantial changes from past policy, including requirements that contingent assets and liabilities must be recorded at “fair value” at the time of closing, not later when imminent and easily estimated, and deal related fees and expenses must be expensed when incurred, not capitalized and amortized.
As an example, consider the accounting for the contingent consideration of an earnout, payable 12 months after closing, but only if the acquired company met a defined financial milestone. Under the old standard, the acquiring company would not place the obligation to pay the earnout on its balance sheet until it looked likely that the financial milestone would be met and the amount of the payment could be easily estimated. Under the new standard, the fair value of the earnout must be estimated and placed on the balance sheet at the time the acquisition closes, then revalued periodically thereafter.
Determining the value of individual assets often is difficult for a management team. They are comfortable with the analysis required to determine whether an acquisition makes sense and at what price, but they are not specialists in determining individual asset values. In addition, the rules governing valuation of intangible assets, especially valuation of in-process research and development, are exceptionally complex and require specialized knowledge to apply.
Teknos provides complete ASC 805 valuation and allocation reports. Unlike traditional valuation firms, the professionals at Teknos understand technology and the special demands of rapid growth. We are experts at estimating the value of the most difficult-to-value assets: software code, product designs, new drugs or medical devices, in-process research and development, patents and copyrights, trade secrets, customer lists, and similar intangibles.
The new requirements for valuing assets and liabilities at the time of closing of the acquisition add pressure to an already complicated negotiation process. The valuation professionals at Teknos come from investment banking backgrounds and understand the ups and downs of the acquisition process. We know how to interpret the merger documents and have experience in dealing with rapidly changing deal terms. We can provide real-time assistance, valuing significant assets or liabilities during negotiations and having values ready for reporting at the time of closing.
For assistance with intangible asset or liability valuation, including real time modeling during terms negotiation, please contact us: .(JavaScript must be enabled to view this email address)