The full extent of the assets of a business or company can seldom be determined simply by looking at its balance sheet.
Many of the assets central to the value of a business will be intangible and not appear on its balance sheet. These intangible assets may include:
- Marketing-related assets, such as brand names, trade marks, domain names, mastheads, copyrighted material and company logos
- Customer-related assets, such as order books, customer contracts and associated relationships and customer lists
- Artist related assets, such as books, magazines musical or literary works and photographs
- Technology-based assets, such as patents, software, databases and internal processes
- Other contract-based assets, such as non-compete agreements, licensing arrangements, franchise agreements, operating or broadcasting rights or contracts at better than market or favourable terms
In some instances it is necessary to consider and value all the assets (both tangible and intangible) of a business for accounting and other purposes. One such instance is following an acquisition or business combination, another is when considering the ongoing value of an asset (or group of assets) for impairment purposes.
Purchase Price Allocations
In a business combination, accounting standards require that the acquirer must measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. This includes intangible assets that meet the required criteria for recognition.
We are able to review the nature of all the assets acquired in a business combination and undertake an allocation of the fair value of the purchase consideration paid for the acquisition between all the acquired identifiable and recognisable assets, both tangible and intangible.
Examples of intangible assets which can meet the identifiability criteria include; customer contracts and customer relationships, software, trademarks, patents, copyrights and licences.
The valuation of intangible assets is a complex process which requires detailed analysis and an understanding the fundamental ways in which an intangible asset generates value for an entity.
Once assets have been recognised, accounting standards require that periodic assessments be made as to whether or not the carrying value of the asset (or group of assets) exceeds its recoverable value. The recoverable value represents an asset’s fair value less costs to sell or its value in use.
All assets must be subjected to a review at the end of each reporting period in order to determine whether there is any indication that an asset may be impaired.
In addition, any intangible assets with indefinite useful life, and goodwill recorded as part of a business combination, must be tested for impairment annually by comparing its carrying amount with its recoverable amount.
The process involved in determining the value in use of an intangible asset involves identification of the cash flows attributable to the asset, an assessment of the expected future cash flows attributable to the asset and an assessment of an appropriate discount rate to apply to these cash flows.
How William Buck can help
Our corporate advisory team has extensive experience in conducting purchase price allocations and impairment testing, having provided these services to a wide range of large private and ASX listed companies.
We understand the pressure faced from various stakeholders when accounting for business combinations and intangible assets. We aim to provide you with commercially relevant and practical advice to assist you in managing these pressures. We can assist you with:
- Calculation of the fair value of the consideration paid in making a business acquisition
- Identifying the material intangible assets acquired that are recognisable under Australian accounting standards
- Advice as to appropriate valuation methodologies and valuation inputs to be used in valuing intangible assets
- Valuing intangible assets
- Conducting periodic impairment testing of the carrying value of cash generating units or intangible assets