Purchase Price Allocations under Statement 141 (Business

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					        Purchase Price Allocations under
                 Statement 141
            (Business Combinations)

             The Appraisal and Financial Reporting
                     of Intangible Assets

                        Gary R. Johnstone, CFA C.P.A.
                              Managing Director
                               August 14, 2001


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                   Historical Perspective


      Prior guidance provided by APB Opinion 16
        (Purchase and Pooling Methods) – 1970 and APB
        Opinion 17 (Intangible Assets) – 1970.

      Under  purchase method, “identifiable” intangible
        assets that could be “reliably measured” were
        valued at their fair values and their remaining
        economic lives were estimated.



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         Compliance under APB Opinion 16


      Based on anecdotal evidence, purchase price allocations were not
       performed as required by APB Opinion 16. Based on our experience,
       companies only performed allocations if the conclusions were expected
       to be beneficial to the reporting companies (e.g., IPRD).

                According to the 2001 Exposure Draft (Business Combinations
                 and Intangible Assets – Accounting for Goodwill), some
                 companies blamed non-compliance on the lack of guidance
                 from APB Opinion 16.

                 Respondents to the 1999 Exposure Draft acknowledged that
                 some intangible assets could be reliably measured, but
                 questioned the cost effectiveness of the measurements.




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            Under APB Opinion 16 (cont.)


   Typical“identifiable” intangible assets identified under
     APB Opinion 16:
           “Mature Industry” Companies (i.e., less
          intangibles): Customer Lists, Assembled
          Workforce, Patents, Trademarks.
          “Technology” Companies: Core/Developed
          Technology, In-Process Technology (IPRD),
          Customer-Related Intangible (IRC concept), and
          Assembled Workforce.


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       Deliberations: 2001 Exposure Draft


     A   new accounting standard that would establish
        goodwill acquired in a business combination, but
        there wouldn’t be any amortization of goodwill as
        previously required by APB Opinion 17. This
        standard would establish a new method of testing
        goodwill for impairment (i.e., methods and
        assumptions that would be used to test for
        impairment).




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              2001 Exposure Draft (cont.)

     An acquired identifiable intangible asset shall be recognized as an
     asset if it meets the criteria of paragraph 63 of FASB Concepts
     Statement No. 5.
              Asset must meet either of the following criteria:
              •   There must be control over the future economic benefits
                  arising from contractual or other legal rights (regardless
                  of whether those rights are transferable or separable
                  from other rights and obligations); or
              •   The asset must be capable of being separated or divided
                  and sold, transferred, rented or exchanged (regardless
                  of whether there is an intent to do so or whether a
                  market currently exists for that asset).

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              2001 Exposure Draft (cont.)


      Proposed       Financial Statement Presentation –
                      The aggregate amount of goodwill shall
                      be presented as a separate line item in
                      the statement of financial position
                      (balance sheet).
                      The aggregate amount of goodwill
                      impairment losses shall be presented as a
                      separate line item in the operating section
                      of the income statement.


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              2001 Exposure Draft (cont.)


        Disclosures –
                      Continue to conform with Paragraph 95 of
                      APB Opinion 16 requiring disclosure of
                      general information in the period in which the
                      business combination is completed.
                      Other requirement – additional information
                      presented in the notes to the financial
                      statements if goodwill “is significant in relation
                      to the total cost of the acquired entity”.


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              New GAAP: Statement 141


     Reasons for Statement 141:
         1.   Analysts and other users indicated a need for
              greater comparability of financial results (i.e., one
              method of accounting for a business combination is
              better than two).
         2.   Users also indicated a need for greater information
              about intangible assets as they are becoming an
              increasingly important asset for a growing number
              of companies.


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        Differences between Statement 141 and
                    APB Opinion16

      All business combinations are deemed to be acquisitions.
      Accordingly, all business combinations should be accounted
      for in the same way (i.e., the basis should be whatever value
      was exchanged) – pooling is gone, only the purchase method
      can be used.

      Identifiable intangible assets must meet either of two criteria
      to be recognized as assets:
         The contractual-legal criteria or

          The separability criterion (i.e., evidence of exchange
          transactions of that asset or similar assets).



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       Differences between Statement 141 and
                APB Opinion 16 (cont.)




      Assembled Workforce does not qualify as an asset
       although it could meet one or both criteria because the
       technique often used to value AWF – replacement cost –
       is not “a representationally faithful measurement of the fair
       value of the intellectual capital acquired in a business
       combination”.




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              New Statement 141Disclosures


         1.   Present the primary reasons for the business
              combination.
         2. Present the allocation of purchase price to assets
            acquired and liabilities assumed by major balance
            sheet description.
         3. When the amount of goodwill “is significant in
            relation to the purchase price paid”, other
            information about those assets is required, such as
            the amount of goodwill by reportable segment and
            the amount of purchase price assigned to each
            major intangible asset class.


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                Other Statement 141 Issues


      Statement 141 supercedes APB 16; parts of APB 16 still
       provide guidance.

      Effective Date: All business combinations initiated after June
       30, 2001. After goodwill is initially recorded in the financial
       statements, Statement 142 (new GAAP) provides guidance on
       the systematic examination of the carrying fair values of
       goodwill and other intangible assets.

      Transition Issue: Previously identified intangible assets that
       would not qualify as a recognized asset under Statement 141
       (e.g., assembled workforce) will need to subsumed into
       goodwill.


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               ValuationVC’s Conclusions

      1.   Identifiable intangible assets still need to be identified, but they
           now need to meet either the contractual-legal or separability
           criteria before they can be recognized as an asset (i.e.,
           disaggregated from goodwill).

      2. APB Opinion 16 lacked information with which to judge the
         integrity of intangible asset valuation – this statement provides
         much more guidance on intangible asset identification and
         recognition.
      3. Assembled Workforce will still need to be valued – it is
         contributory asset – but it will not be recognized/disaggregated
         from goodwill as before because FASB did believes that the
         replacement cost approach was not a “representationally faithful
         measurement”.



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                V/VC Conclusions (cont.)


       4. Going forward, previously identified Assembled
          Workforce will be subsumed into goodwill –
          consequently, no more AWF amortization.
       5. Per Statement 142, goodwill will no longer be
          amortized.
       6. Additional disclosure requirements if goodwill is a
          significant portion of the purchase price.
       7. Public companies will continue to make “pro forma”
          earnings announcements (e.g., “pro forma EPS
          before amortization of purchased assets”), but the
          SEC is studying ways to “standardize” this
          presentation.

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                 V/VC Conclusions (cont.)

      8.   IPRD does not qualify as an asset – it receives same treatment as
           before (i.e., it is expensed not capitalized under FAS no. 4 –
           Applicability of FASB Statement No. 2 to Business Combinations
           Accounted for by the Purchase Method). Given that goodwill will not
           be amortized, IPRD may or may not have the same attraction as
           before. To the extent that the acquirer can convince its analysts of
           the merits of adding back IPRD charges and goodwill impairment
           charges (note: impairment charges may be seen as a possible
           negative signal to the markets), the acquirer will be indifferent as to
           whether there is an IPRD write-off or not. Otherwise, the acquirer
           may prefer the certainty of the IPRD (immediate) write-off as
           compared to the less manageable periodic impairment charge.
      9.   Technology companies are still more likely to conform to allocation
           requirement,but jury is out as to whether technology companies and
           mature industry companies are more or less likely to allocate than
           before Statement 141.


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