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Purchase Price Allocation and Impairment Testing

When working in bankruptcy and reorganization, one has to consider whether the purchaser is a private or public company, and how various financial and accounting regulations may affect that purchaser. In its broadest definition, a business transaction includes sales, acquisitions, mergers, spinoffs, licensing, and joint ventures that involve transferring title of intellectual property from one entity to another.

The valuation process is obviously driven by business issues. However, national and international tax and accounting regulations and standards also play a role in these transactions. In the US, the most important of these regulations, particularly for public companies, are the FASB sections 141, 142, 144, and 147.

These FASB sections primarily speak to valuation and the booking of assets. They require that all business combinations must use the purchase method of accounting, and must value all the intangibles in what is known as a purchase price allocation report. This purchase price allocation also must be updated on a regular basis, for so-called “impairment tests” to see if the value of the intangible asset has been impaired or reduced in value. In addition, these regulations also provide standard provisions for depreciating the remaining useful life of intangible assets and how those assets will be amortized. Again most briefly stated, these sections require that any intangible asset or IP that has a finite useful life must be valued, capitalized, and then depreciated. However, those intangibles with indefinite useful lives (e.g. many trademarks) are not amortized.

Under FASB, IP and other intangible assets must be valued on an asset by asset basis in what is known as a stand-alone value. There is more detail, more complexity, while at the same time the regulations are striving for more transparency, and more frequent verification of the value of intangibles, making this a very complex topic that is not well understood by many who are not specialists in IP and the accounting aspects of these regulations. Experts at CONSOR are well-versed in the federal requirements, and have prepared numerous reports involving purchase price allocation and impairment testing.