2. Purchase price allocations: a primer on SFAS 141

A Quick explanation of SFAS 141: Business Combinations

If you've been through an M&A transaction in the past few years, you've experienced the need for a purchase price allocation to stay in compliance with Generally Accepted Accounting Principles (GAAP) according to SFAS 141.

SFAS 141 is that new-ish accounting rule (circa 2001) associated with Fair Value measurements pertaining to M&A transactions. This is the one that did away with the old pooling-of-interests accounting method. Nota bene: SFAS 141 is making way for SFAS 141(R) – the “(R)” means revised – which goes into effect at year-end 2008. More on that later.

SFAS 141 requires companies to allocate long-lived intangible assets, formerly bundled into the single “goodwill” line item, into various different buckets including anything from customer relationships, retained workforce, intellectual property, and others including good old goodwill. As it turns out, this is quite an exercise, and it warrants the help of valuation boutiques such as Arcstone to do the work properly. In the words of Lynn Turner, former Chief Accountant of the SEC,

“…in almost every instance, companies will be required to obtain the assistance of a competent and knowledgeable professional to assist in the valuation of these intangible assets.”

In order for an intangible asset to be classified distinctly from the goodwill catch-all, it must be identified as both contractual in nature and separable from the goodwill of a business. These assets are typically customer-related, marketing-related or technology-based. Some of these assets will have determinable lives, and may be amortizable. Goodwill and other intangible assets with non-determinable lives are non-amortizable.