Business Combinations
IFRS 3, SFAS 141
The worldwide accounting treatment for business combinations is now largely consistent following the issue of International Financial Reporting Standard 3 ('IFRS 3') on 31 March 2004. IFRS 3 requires all business combinations to be accounted for by applying the purchase method. This is consistent with SFAS 141, the standard applicable for US accounting purposes. IFRS 3 and SFAS 141 apply to all listed companies in the EC and all SEC registrants respectively.
The standards require the buyer to recognise all identifiable assets, liabilities and contingent liabilities which have been acquired in any transaction at their fair values at the acquisition date. This includes all tangible and intangible assets and goodwill. Goodwill and intangible assets with indefinite lives are no longer amortised but must then be tested annually for impairment.
American Appraisal specialises in the identification of those intangible assets involved in an acquisition. The intangible assets which are commonly identified are trademarks, brands, patents, copyrights, technology, customer contracts, customer relationships, databases, software, mailing lists and development assets. We undertake a purchase price allocation exercise which results in a valuation for each of the identifiable intangible assets and a value for the residual goodwill.
We also assist our clients in allocating the residual goodwill to the reporting units which is a key consideration for future impairment testing (See Impairment Reviews). Our valuation also includes an assessment of the appropriate economic lives for each of the intangible assets assigned a finite life.
American Appraisal has extensive experience of undertaking purchase price allocations for business combinations, having worked for both UK and US listed companies. Our independence is paramount for commissioning such work. Under the strict independence rules which apply to all listed companies worldwide, auditors are prohibited from undertaking this valuation work. American Appraisal is regularly recommended by 'Big 4' audit firms where independence rules prohibit their involvement.