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, ASC 805, or International Financial Reporting Standards (IFRS), IFRS 3, 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 and IAS 38 Valuations

ASC 805 relates to 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 38 (IAS 38).

ASC 805 requires that the acquiring company determine the value of every asset and every liability, including intangibles. There are some substantial changes in ASC 805 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 purchase price 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: info@teknosassociates.com

Asset and Goodwill Impairment

When a company has intangible assets or goodwill on its balance sheet, it must annually review the value of those assets to determine whether they are “impaired” and, if so, determine the amount by which the value should be reduced.

ASC 350 and 360 and IAS 36

The FASB has published standards governing testing and impairment of intangibles and goodwill. The rules require that a company annually conduct a two step test. 1. The company must compare the “fair value” of each reporting unit to its carrying value. 2. If the “fair value” is less than the carrying value, then the company must allocate the reporting unit’s “fair value” to its individual assets and liabilities, including goodwill. If the “fair value” of goodwill is equal to or greater than the carrying value, then there is no impairment. However, if the “fair value” of goodwill is less than the carrying value, then there is an impairment loss equal to the difference in values.

The rules about the asset impairment or disposal of long lived assets are similar.  A company recognizes an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows.  The impairment loss is defined as the difference between the carrying amount and new fair value of the asset.

Expert Asset and Goodwill Impairment Testing Services

Teknos assists management teams by valuing intangible or long-lived assets, determining which have finite lives and determining the length of those lives, and valuing goodwill. Because of our focus on technology companies, we understand the complexities of valuing specialized assets such as patents, licenses, tradenames, software code, drug compounds, mask-works, know-how, and in-process research and development.

For assistance with asset and goodwill impairment testing, please contact us: info@teknosassociates.com