Purchase price allocation: Ensuring accuracy, transparency and compliance
Intangible assets
Assessing the valuation and impairment of clients’ assets has always demanded accountants’ toughest scrutiny and clearest judgment. Those skills and insights have never been more
Intangible assets come in various forms and whilst a list of common classes of intangible asset can provide a helpful stating point, each transaction should be assessed based on its specific facts and circumstances. It is helpful to conduct a thorough review of the value drivers and sources of competitive advantage that a business benefits from, whilst keeping an eye on assets often capitalised in the relevant sector, and recognition criteria as defined with the appropriate accounting standards. Valuation The valuation of intangible assets is generally based on one or a combination of the three principal approaches to valuation – the income, market and cost approaches. Given the distinctive and varied nature of intangible assets, a number of specific valuation techniques have been developed by specialist practitioners since the early days of PPA and, whilst there is now a degree of consensus regarding which approaches best suit which classes of asset, there remain significant challenges to valuation due to difficulties in forecasting, benchmarking and separation. To summarise: • A general absence of directly comparable market data – given the lack of active markets for many classes of intangible asset – brings significant challenges to valuation benchmarking under the market approach • The income approach is often challenging due to difficulties in separately forecasting revenue (and associated costs) generated by distinct intangible assets and in benchmarking risk profiles and required returns • The cost approach is often hampered by a lack of detailed information regarding the cost to develop assets in their existing form, and challenges in the separation of historical development costs from costs related to other assets or activities Given the challenges and complexities involved, conducting robust and supportable intangible asset valuations for PPA requires a detailed understanding of the suite of techniques and methodologies that are typically deployed, and experience of rationalising conclusions in the context of the wider PPA exercise. Despite the development and fine-tuning of specialist valuation techniques, intangible asset valuation remains highly subjective. The stark
reality is that key inputs and assumptions are often difficult to support through internal data analysis or external benchmarks. As such, intangible asset valuation is thoroughly scrutinised by auditors, particularly where values are material.
Valuation of other assets and liabilities
critical. ICAEW
Whilst intangible assets are often the main focus in PPA exercises, the requirement is to assess the fair value of all acquired assets and liabilities. As a starting point, consideration may be given to whether the book value of other assets (and all liabilities) provides a reasonable representation of fair value. If that is not deemed to be the case, fair value assessments may need to be undertaken. Other assets and liabilities that it may be necessary to fair value include (but are not limited to):
• Property • Machinery and equipment • Inventory • Deferred income • Contingent liabilities
Finalising
Following the valuation of the relevant assets and liabilities a number of steps are required to finalise a PPA exercise. These typically include: • Conducting secondary valuation approaches, sense- checks and sensitivity analysis • Calculating the residual goodwill (at a CGU level if required) • Conducting allocation sense-checks such as IRR and WARA analysis • Comparing allocations to industry benchmarks • Documenting the analysis, conclusions and support for key assumptions
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