Friday, October 12, 2012

Purchase Price Allocation Review- Intangible Assets- A Cross Check

Meger & acquisition activities never disappear, even when the economy appears to be slowed down. Entity with strong balance sheet and with huge cash on hand will acquire certain companies when the valuation is relatively cheaper.

When your audit client acquire a company. They are required to perform Purchase Price Allocation review, which allocates the consideration to the relative fair value of the tangible and intangible assets / liabilities acquired, with the remaining amounts recorded as goodwill/ bargain purchase.

Usually, an audit client will engage an external valuer to value the tangible assets / liabilities and intangible assets acquired. In general, intangible assets (such as: brand name/ customer list) is not recorded on acquiree' balance sheet.

We will talk more about the details of purchase price allocation review in our future posts. A very way to understand the business rationale of acquiring the target is to compare the net asset of the target company to total consideration paid by your audit client.

To illustrate, audit client has paid US$10mil to acquire a target company with a net asset value of US$1mil. It appears to you that the Company has paid US$9mil to acquire certain intangible assets or certain items not recorded at fair value on target's balance. There is a number of possible reason:

- target company has strong brand name;
- target company has comprehensive list of customer relationship;
- land & building was recorded at cost and not at fair value (note: this is allowed under accounting standard);
- a goodwill the Company is willing to pay for; etc etc

By comparing the total consideration against the net asset of the target company, you will be able to find out the business rationale of acquiring the target company and assess if the acquisition fits into the client's long term business objective. Please, never fail to understand the business rationale while you perform the auditing.

1 comment: said...

I may adopt some of these ideas. Already using many of them but
got some interesting in your post.. thanks