Valuation for allocation of purchase cost and consideration for shares allocated

Valuation for allocation of purchase cost and consideration for shares allocated

Clients include: GEMars, Philip Morris and Sequa.

Our experience with valuations for purchase price allocation (purchase accounting under US GAAP) is extensive.

An analysis in the US market shows that intangibles and goodwill constitute 80% of the average purchase price of the acquired companies. IFRS3 puts intangibles on the map as a core management issue by imposing mandatory reporting requirements on all companies reporting under IFRS.

We are moving more to fair value and the changes concerning accounting for business combinations are significant with intangibles. Standard 3 represents the shift to transparency. All EU companies on listed Exchanges have been required to report under IFRS from 2005.

The Standard requires that intangibles are recognised separately on the balance sheet as part of a purchase price allocation. Before the Standard the difference between price and book value was goodwill. Intangibles were swept up in this 'junk' phrase. Now assets need to be identified, valued and separately included on the balance sheet.

The list of intangibles under the Standard is extensive and includes trademarks and brands, non-compete agreements, customer and artistic related assets, contract based assets (e.g. licensing, drilling contracts, employment contracts etc.) and those led by technology (patents, software, databases, secrets).

Under FASB 141 and 142 the SEC can and does call for the working papers supporting a company's purchase price allocation and valuations, and has the ability to ask for the work to be re-performed. No better reason for appointing an expert.

Valuations in connection with the acquisition by GE Med of part of Thales in France, Mars of Royal Canin, Salton’s acquisition of the Pifco brand portfolio and the merger of Introgene and U-Bisys to form Crucell listed on the NASDAQ and Euronext (Amsterdam) markets are public domain and typical.

Following our work Crucell for example noted in its Consolidated Financial Statements that based upon an independent valuation its allocation of the purchase price in excess of the fair value of the net tangible assets acquired to intangible assets and in-process research and development totalled €50,782,091 and €84,140,909, respectively. Intangible assets consisted principally of technology valued at €6,652,418, workforce valued at €4,486,615 and goodwill valued at €39,643,058.

The USA Securities and Exchange Commission also require these reports on purchase cost allocations.

Instructions from international accounting firms flow from conflict of interest rules which dictate that independent experts and not the auditors, must undertake the valuations.

The appraisal apportions the purchase price of the assets acquired for accounting purposes. Our expertise is particularly helpful because many of these assets are intangibles such as brand names, patents, workforce and copyright with a residual goodwill element. A recent appraisal of this kind was conducted for the auditors to Worldonline in respect of post acquisition valuation.

Section 108 of the Companies Act refers to S44 (consideration for shares recently allotted to be valued) and S103 (non-cash consideration to be valued before allotment). Valuation Consulting has undertaken a number of these valuations.

The valuation required needs to be made by an independent person, taken to be an auditor (108 [1]) although the auditor can appoint someone else to do the valuation if that third party is (a) sufficiently knowledgeable and (b) not an “officer or servant” of the company (excluding auditors).

The auditor would then take the independent valuation and present this together with a report (under this section (108[2], [3]).


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