a person working at a desk using a calculator

Are You Correctly Applying Fair Value Standards? Purchase Price Allocations and Goodwill Impairment Tests

February 18, 2011

Are You Correctly Applying Fair Value Standards? Purchase Price Allocations and Goodwill Impairment Tests

Synopsis
2 Minute Read

Insight
Insight

The transaction market in Canada has declined over the last few years, but the importance of properly recognizing assets acquired in an acquisition has not. Properly accounting for assets acquired in a merger or acquisition can have significant monetary implications.

An acquirer in an asset or share purchase should always take the time to have a proper purchase price allocation completed. A purchase price allocation divides the purchase price among the tangible and intangible assets and liabilities using fair value. Any residual amount of the purchase price after allocation is recorded as goodwill.

The key concept behind fair value is that the value of an asset or liability is based on what a market participant would pay to acquire the rights to the asset or transfer the liability. This applies whether you use the Canadian Institute of Chartered Accountants (CICA), the Financial Accounting Standards Board (FASB), or the International Financial Reporting Standards (IFRS). Most companies do not regularly engage in transaction accounting so management is often inexperienced with financial accounting rules and procedures when dealing with transactions.

Potential errors in purchase accounting include:

  • Failing to account for all identifiable intangible assets or improperly identifying intangible assets
  • Using incorrect or suspect methods to value the assets and liabilities
  • Valuing the assets from a buyer-specific perspective
  • Failing to properly determine market participant synergies or not eliminating acquirer-specific synergies
  • Determining the proper remaining useful life of the assets
  • Over/under allocation of goodwill

Each of these errors can have a significant impact in subsequent accounting periods.

Insights

  • June 16, 2022

    Selling your practice — You have options

    Having a Divestiture Advisor guide you through the divestiture process can protect you from some of these risks, while maximizing your valuation and providing you with multiple offers to chose from.

  • Performance

    June 13, 2022

    [Listen] Getting to grips with municipal asset management

    Energy and Utilities Leader Gord Chalk visited Municipal World’s MW Presents Podcast to discuss how local governments can take a more strategic approach to asset management.

  • Performance

    June 13, 2022

    Build a stronger food and beverage business by building stronger business skills

    In an industry known for passion and purpose, knowing your numbers can be your biggest differentiator. Here’s how the right advisor can help.