Price Allocation: Challenges During Due Diligence

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Presenting a live 110‐minute teleconference with interactive Q&APurchase Price Allocation:Valuation Challenges During Due DiligenceOvercoming Critical Issues Arising in Business Stock and Asset SalesWEDNESDAY, DECEMBER 21, 20111pm Eastern 12pm Central 11am Mountain 10am PacificToday’s faculty features:Michael Hauser,Hauser Shareholder,Shareholder Maddin Hauser Wartell Roth & Heller,Heller Southfield,Southfield MichMich.Steve Hastings, Principal, ValueScope Inc., Southlake, TexasBrian Jones, Financial Reporting Practice Leader, Kotzin Valuation Partners, PhoenixFor this program, attendees must listen to the audio over the telephone.Please refer to the instructions emailed to the registrant for the dial-in information.Attendees can still view the presentation slides online. If you have any questions, pleasecontact Customer Service at1-800-926-7926 ext. 10.

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Purchase Price Allocation: ValuationCh llChallengesDDuringi DDue DiliDiligenceSeminarDec. 21, 2011Michael Hauser, Maddin Hauser Wartell Roth &Hellermkh@maddinhauser.comBrian Jones, Kotzin Valuation Partnersbjones@kotzinvaluation.comSteve Hastings, ValueScope

Today’s ProgramTax Issues With Pre-Close PPAs[Michael Hauser]Slide 7 – Slide 23Accounting Issues With Pre-Close PPAs[Steve Hastings]Slide 24 – Slide 39Current Hot Topics In The Pre-Close Arena[Brian Jones]Slide 40 – Slide 47

Michael Hauser, Maddin Hauser Wartell Roth & HellerTAX ISSUES WITH PRE‐CLOSEPRE CLOSEPPAs

Overview Of Threshold Issues1. Taxable or tax-free acquisition2 Corporation,2.Corporation LLC or partnership being acquired3. Stock purchase or asset purchase4. Motivating factors of partiesMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com8

Types Of Corporate Tax-FreeAAcquisitionsi iti(Sect.(S t 368)1. “Type A” – Mergers2. “Type B” – Stock-for-stock3 “Type3.Type C”C – Transfer of all assets4. “Type D” – Spin-offs and split-offsMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com9

General Requirements OfTax-Free Corporate Acquisitions1. Continuity of shareholder ownership (i.e. target corp.shareholders receive stock in acquiring corp.)2. Continuity of business enterprise3. Legitimate non-tax business purposeMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com10

Asset Allocation In Tax-FreeAcquisitions?1. Sect. 362(b) – Carry-over basis at net book value (nothing toallocate)2. Inherit tax attributes of predecessor companies (subject tocertain limits to prevent “shopping” in net operating losses,etc.)Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com11

Tax-Free Acquisitions OfLLCs And Partnerships1 Mergers (Reg.1.(Reg 1.708-1)1 708-1)2. Contributions of assets (or LLC/partnership interests) inexchangeg for newlyy issued equityq y in acquiringqg LLC3. Carry-over basis4 H4.However, assett allocationlltiprinciplesi i l may apply,l aspartnership tax laws permit special allocation of depreciationto prevent partners from suffering detriment from low-basisassetsassets.Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com12

Structuring Taxable Acquisitions (1)1. Stock purchasea. GGenerallyll bbettertt ffor sellerllb. Seller of stock assured of capital gain treatmentand avoids two-level tax (for C corporations)c Buyer gets basis in stock (non-depreciable)c.(non depreciable) andcarry-over basis in corporate assets – nodepreciable / amortizable basis step-up.d. Buyer inherits actual and contingent liabilities.Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com13

Structuring Taxable Acquisitions (2)2. Asset purchasea. GGenerallyll bbettertt ffor purchaserhb. Seller of assets may not get capital gain treatment(depends on allocation of assets) and incurs twolevel tax (for C corporations).corporations)c. Buyer gets basis in assets (likely depreciable),rather than carry-over basis, and asset allocationwill determine depreciable/amortizable basisstep-up.d. Buyer does not generally inherit liabilities.Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com14

Purchase Price Allocation To Assetsa. Sect. 1060 requires disclosure of purchase priceallocation for asset purchase involving ongoingbusiness.g agreementgbetween buyery and seller onb. Arm’s lengthasset allocation will be binding on the parties andgenerally will be binding on the IRS (absent unusualcircumstances).c.No requirement that buyer and seller agree onallocationMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com15

Cost/Benefit Of Allocation Agreementa. IRS Form 8594 requires “checking box” whether buyerand seller agreed on the allocation, and requests otherparty’spartys Tax IDID.b. Agreement will provide a strong presumption thatasset allocation should be respected.pc.Agreement will also bind parties with disparateinterests to a potentially unwelcome compromise,whichhi h ththey may wishi h tot avoid.idMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com16

Asset Allocation CategoriesCategories listed in IRS regulations:a.ab.c.d.e.f.g.Class I: CashClass II: Publicly traded securitiesClass III: Accounts receivable, certain debtsClass IV: InventoryyClass V: Fixed assetsClass VI: Specific intangibles (know-how, TM, NCC)Class VII: Goodwill (residual allocation equal towhateverh tnott allocatedllt d tto otherth categories)ti )Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com17

Cost/Benefit Of Allocations: Buyer (1)1 A/R and ento area e generallygene all the best categoriescatego ies forfothe buyer – fastest write-off (prevent incomerecognition on turnover)2. Depreciable fixed assets will have next-fastest write-off(3-7 years) – technology items, equipment, furniture3. Real estate improvements – slower write-off:1 5-39years (parking lot, residential or commercial bldg.)4 Goodwill and other intangibles – 15-year4.15 year5. Land and subsidiary stock are non-depreciable.Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com18

Cost/Benefit Of Allocations: Buyer (2)1. Faster write-offs delay income recognition (timingdifference).2. Depending on difference in tax rates and availablelosses, deferring income to future may not bepreferable.3. For taxpayers that will benefit from capital gains taxtreatment, avoiding short-life personal property willprevent ordinary income recapture later.laterMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com19

Cost/Benefit Of Allocations: Buyer (3)1. Real estate generally does not require Form 8594disclosure.2. “Cost segregation”: Engineering firms study property indetail to maximize allocation to short-life personalpropertypp y and minimize allocation to 27-to-39-yearybuilding shell.3. Potential short-life property within real estate: Floorcoverings,iwallll partitions,titisigns,iwindowi dttreatments,ttappliances/kitchen, back-up generators, specializedHVAC, plumbing, electrical (for kitchens, labs, etc., notfor whole buildings)Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com20

Insolvency1. Insolvency is judged immediately prior to COD event.2. Insolvency relief applies to the extent a taxpayer isinsolvent If debts are 100insolvent. 100,000;000; FMV of assets is 60,000, and 50,000 of COD occurs; only 40,000 ofCOD qualifies for insolvency exception.3. Per Merkel case, loan guarantees are considered debtsif it is more likely than not taxpayer will be called on topay.4. However, cancellation of loan guarantee is generallynot COD (COD income incurred by the borrower).Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com21

Cost/Benefit Of Allocations: Seller1. Capital gains vs. ordinary income (Note: C corporationsdo not receive favorable tax rates from capital gains)2. Availability of installment sale treatment for sellerfinanced acquisitions (on capital assets only)3. Availability of Sect. 1031 tax-free exchange treatment(for real estate and certain fixed assets, not goodwill)4 G4.Goodwilld ill iis a capitalit l asset;t salel producesdcapitalit l gaini(except to extent amortization taken on purchasedgoodwill)Michael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com22

Example: Stock Vs. Asset Sale1. Buyer is acquiring Plony Co., a family-owned Ccorporation, for 10 million.2. Plony Co. is a service business; its only asset is goodwill.3. Stock salea. SellerS ll pays 1.5 1 5 millionilliini federalf dl tax (owner’s(’ 1040)b. Buyer gets 10 million stock basis, no goodwill basis4. Asset salea. Seller pays 3.5 million in corporate tax, 1 million intax on owner’s 1040, nets 5.5 millionb. Buyer gets 10 million goodwill basis, deducts 666 667/ ea from 666,667/yearf om income forfo 15 yearsea sMichael K. Hauser, Esq. / 248-208-0715 / mkh@maddinhauser.com23


Accounting StandardsFASB guidance: Accounting standards codifications (ASC) ASC 805 (business combinations) ASC 350 (goodwill and intangible assets) ASC 360 (accounting for the impairment or disposal of long-livedassets)t ) ASC 740 (income taxes)25

Accounting Standards (Cont.)ASC 805 (business combinations) Formerly Statements of Accounting Standards (SFAS) 141(R) g for acquisitionsRequires purchase method of accounting Specifically prohibits use of pooling of interests Provides recognition criteria for identifiable intangible assetsseparate from goodwill An asset arising from a contractual or legal right, such as apatent trademark or copyright; orpatent, An asset other than contractual that can be sold, transferred,licensed, rented or exchanged individually or in combination26

Accounting Standards (Cont.)ASC 805 (business combinations), Cont. Intangibles categorized by type Marketing, customer, artistic, contractual, technology Examples: Trade name, trademark, customer list, patent, software,intellectual property, non-competition agreements Intangibles valued by appropriate approaches and methods Approaches: Income, market and cost Methods: Relief from royalty, excess earnings, cost to recreate, etc. Determination of the intangible’s remaining useful life Definite: Specific estimate with support such as contract term orutilization of attrition rate (customer list/relationships) Indefinite:I d fi it SubjectS bj t tot ASC 350 impairmentiit testingt tii subsequentinbtreporting periods27

Accounting Standards (Cont.)ASC 350 (goodwill and intangible assets) Amortization of goodwill is not permitted. Prior to SFAS 142 (effective Jan.Jan 1,1 2002),2002) goodwill wasamortized over its useful life up to 40 years.Goodwill is still recognized on the balance sheet and tested withother indefinite-livedindefinite lived intangibles on an annual basis,basis via a two-steptwo stepprocess.Step #1: Test for potential impairment by comparing fair value ofreporting unit to its carrying valueStep #2 (if necessary): Allocate the fair value of the firm to itstangible and intangible assets, and compare the residual with thecarrying value of goodwill28

Accounting Standards (Cont.)ASC 360 (accounting for impairment of long-lived assets) FASB guidance on treatment of finite-lived assets Two step process,Two-stepprocess although different than ASC 350 Initial test utilizes undiscounted cash flows for recoverability Less impairment risk ploss is onlyy recognizedgif the carryingy g value of theImpairmentfinite-lived asset is not recoverable, based on sum ofundiscounted cash flows. Amount of the impairment loss is the excess of carrying value overits fair value.29

Accounting Standards (Cont.)Income tax considerations Contingent consideration arrangements are generally notrecognized for tax purposes until they become fixed anddeterminable. If acquisition-related costs will result in a future deduction shouldthe combination not occur,occur the acquirer would report a deferred taxasset when related cost is charged to expense. If a deferred tax asset is reported for acquisition-relatedacquisition related costsonce the combination is consummated, acquirer must assesswhether the deferred tax asset continues to exist or should bewritten off.off30

Accounting Standards (Cont.)Income tax considerations (Cont.) Difference in book and tax goodwill results in a temporarydifference, and deferred taxes should be recognized. A deferred tax liability related to the temporary difference ingoodwill that is not deductible is prohibited. A deferred tax liability is not recorded for the excess of bookgoodwill over tax goodwill, while a deferred tax asset is recordedfor the excess of tax goodwill over book goodwill.goodwill31

Accounting Standards (Cont.)Book and tax valuation differences Valuation estimates are important for acquisitions, restructuringsand tax planning. Some inconsistencies between financial reporting and taxreporting continue to exist, despite improvements in recentstandards.standards Key differences include: AllocationAllti standardst d d Standards and definitions of value Difference in purchase price32

Accounting Standards (Cont.)Book and tax valuation differences (Cont.)Financial ReportingpgTax ReportingpgAllocation StandardsASC 805 - formerly FAS 141, 141(R)IRC Section 338, 197, 754, 1060ASC 350 and 820Revenue Ruling 59-60 and Tax Court CasesStandards and Definitions of Value"Fair Value" - market participants"Fair Market Value" - willing buyer, willing sellerIntangible categories valued in aggregate at reporting unit Certain intangibles valued on individual basis at legallevelentity levelFair value estimate always includes tax amortizationbbenefitfitTax amortization benefit is included if amortization ind d tibldeductibleValuation may not consider legal ownership or transferpricingConsideration of difference between economic and legalownership and transfer pricing policiesDifferences in Purchase PriceTransaction costs are excludedCertain transaction costs are includedFair value measurement of contingent considerationand liabilitiesContingent consideration and liabilities not includedDeferred taxes are includedDeferred taxes are excludedAccrued Liabilities are includedAccrued Liabilities are primarily excluded33

Sensitivity Analysis:Allocation And AmortizationPulling it all together: The valuation dashboard Allows for sensitivity analysis of key intangible assumptions and the associatedeffect on fair value and annual amortization Purchase price allocation models are typically dynamic, especially when utilizingan excess earnings model with contributory asset charges.Valuation MethodPurchase Price AllocationI di t dIndicatedValuePurchase Price Allocation SensitivityEstimatedEtit dLifeAnnuall IIntangibleAtiblAmortizationResulting InputInputDiscounted Cash Flow Analysis 209,131Unsystematic Risk Premium5.24%Intangible Discount Rate22.55%Working Capital 43,095Trade Name Royalty Rate3.00%Customer List - Attrition Rate4.00%12 58112,581Sponsor Relationships - Attrition Rate2 50%2.50%40,656Training/Compliance Months to Recreate3.0Non Compete 1 - Ability (1st year)25.00%Fixed Assets622Oth AssetsOtherAtTrade Name / TrademarksCustomer ListSponsor RelationshipsTraining/ComplianceIndefiniteTested annually41,288123,4414,56213351Non Compete 1 - Ability (2nd year)50.00%308Non Compete 1 - Ability (Cumulative)50.00%5.00%5.00%4,62415Non Compete Agreement 13,96221,981Non Compete 1 - Willingness (1st year)Non Compete Agreement 21 2971,2974371Non Compete 1 - Willingness (2nd year)Proprietary Software12,0008Goodwill (including workforce)44,444IndefiniteFair Value of Net Assets 209,1311,500Tested annually 7,951Non Compete 1 - Willingness (Cumulative)5.26%Non Compete 2 - Ability (1st year)15.00%Non Compete 2 - Ability (2nd year)25.00%Non Compete 2 - Ability (Cumulative)20.00%Non Compete 2 - Willingness (1st year)5.00%Non Compete 2 - Willingness (2nd year)5.00%Non Compete 2 - Willingness (Cumulative)5.26%Software Life (prior to obsolescence)10ControlsCumulative cannot exceed 100%Cumulative cannot exceed 100%Cumulative cannot exceed 100%Cumulative cannot exceed 100%34

Sensitivity Analysis:Allocation And Amortization (Cont.)Intangible valuation - Sensitivity of intangible discount rateIntangible Allocation - Discount Rate at 22.55%Intangible Allocation - Discount Rate @ 23% 180,000 180,000 44,444 160,000 152,833 140,000 120,000 12,000 100,000 41 288 41,288 80,000 40,656 4 562 4,562 4,624 5,259in thoussaandsin thoussaands 152,833 140,000 120,000 60,000 46,674 160,000 12,000 100,000 40,367 4,476 4 612 4,612 5,116 80,000 60,000 40,000 40,000 20,000 20,000 0 0 39,587Increasing the intangible discount rate results in lower intangible valuesthat are based on the income approach.Software was based on the cost approach, so it remains the same.35

Sensitivity Analysis:Allocation And Amortization (Cont.)Trade name/trademark – Sensitivity of royalty rateIntangible Allocation - TN/TM Royalty @ 3.0%Intangible Allocation - TN/TM Royalty @ 2.5% 180,000 180,000 44,444 160,000 152,833 140,000 120,000 12,000 100,000 , 41 288 41,288 80,000 40,656 4 562 4,562 4,624 5,259in thoussaandsin thoussaands 152,833 140,000 120,000 60,000 47,214 160,000 12,000 100,000 45,293 4,562 4 624 4,624 5,259 80,000 60,000 33,880 40,000 40,000 20,000 20,000 0 0Decreasing the royalty rate lowers the value for trade name andtrademarks, but increases the value of the customer list and goodwill.Customer list increases, because the value of a contributory asset andthe associated charge have decreased.36

Sensitivity Analysis:Allocation And Amortization (Cont.)Customer list – Sensitivity of the annual attrition rateIntangible Allocation - Customer Attrition @ 4%Intangible Allocation - Customer Attrition @ 8% 180,000 180,000 44,444 160,000 152,833 152,833 160,000 140,000 140,000 120,000 12,000 100,000 41 288 41,288 80,000 40,656 4 562 4,562 4,624 5,259in thoussaandsin thoussaands 120,000 60,000 53,587 12,000 100,000 32,890 4,562 4,624 4 513 4,513 80,000 60,000 40,000 40,000 20,000 20,000 0 0 40,656Higher attrition results in lower customer list value and affects noncompete value, based on applied methodology.Decrease in customer list and non-compete allocated to goodwillHigher attrition also reduced remaining useful life from 12 years to 10years.37

Sensitivity Analysis:Allocation And Amortization (Cont.)Determination of definite or indefinite lifeExample: Trade name/trademarksEstimated Useful Life10 yearsIndefinite 27,742 27,742PV residual valueNone8,224Tax Amortization Benefit3,6184,690Tax Amortization Benefit Premium13.0%13.0%Fair Value of Intangible31,36040,656Annual amortization (book)3,136None, tested annually forimpairmentPV of estimated net cash flows over 10years38

Sensitivity Analysis:Allocation And Amortization (Cont.)Ranges of value – Reasonableness and sanity checks Not always one answer. Allowing auditors to get comfortable with howmodel moves and impact of changes makes reviews go much smoother.smootherAs shown, there is always an offset to other asset categories given achange.Valuation MethodPurchase Price AllocationI di t dIndicatedValuePurchase Price Allocation SensitivityEstimatedEtit dLifeAnnuall IIntangibleAtiblAmortizationResulting InputInputDiscounted Cash Flow Analysis 209,131Unsystematic Risk Premium5.24%Intangible Discount Rate22.55%Working Capital 43,095Trade Name Royalty Rate3.00%Fixed Assets622Oth AssetsOtherAt12 58112,581Trade Name / Trademarks40,656Customer ListSponsor RelationshipsTraining/ComplianceIndefiniteTested annuallyCustomer List - Attrition Rate4.00%Sponsor Relationships - Attrition Rate2 50%2.50%Training/Compliance Months to Recreate3.0Non Compete 1 - Ability (1st year)25.00%41,288123,4414,56213351Non Compete 1 - Ability (2nd year)50.00%308Non Compete 1 - Ability (Cumulative)50.00%5.00%5.00%4,62415Non Compete Agreement 13,96221,981Non Compete 1 - Willingness (1st year)Non Compete Agreement 21 2971,2974371Non Compete 1 - Willingness (2nd year)Proprietary Software12,0008Goodwill (including workforce)44,444IndefiniteFair Value of Net Assets 209,1311,500Tested annually 7,951Non Compete 1 - Willingness (Cumulative)5.26%Non Compete 2 - Ability (1st year)15.00%Non Compete 2 - Ability (2nd year)25.00%Non Compete 2 - Ability (Cumulative)20.00%Non Compete 2 - Willingness (1st year)5.00%Non Compete 2 - Willingness (2nd year)5.00%Non Compete 2 - Willingness (Cumulative)5.26%Software Life (prior to obsolescence)10ControlsCumulative cannot exceed 100%Cumulative cannot exceed 100%Cumulative cannot exceed 100%Cumulative cannot exceed 100%39

Brian Jones, Kotzin Valuation PartnersCURRENT HOT TOPICS IN THEPPA ARENA

Why Should We Care? Earningsg pper share impactpof the transaction - will the deal be accretive or dilutive?o Acquisition-related costs are expensed vs. capitalized.o Number of assets (and liabilities) recognized Backlog and deferred revenue are often overlooked,overlooked but important.importanto Finite lived assets vs. indefinite lived assets - amortization expense vs. annual impairment testingo Useful life considerationso InventoryIn nt r step-upt p po Leases – favorable/unfavorable Structuring purchase considerationo ContingentC iconsiderationid i - balanceb lsheeth andd incomeistatement effectsffo Off-balance sheet entities - consolidation surpriseso Financing deals - financial instruments with mandatory redemption provisions - liability vs. equitytreatment Other pre-deal issueso Collaboration of management, auditors and valuation specialists is essential up front.o HowH liabilitiesli biliti are recognizedi d willill affectff t liquidityli idit measures ini debtd bt Board/investor expectations must be aggressively managed.41

Acquisition-Related (Transaction) Costs Transaction costs that the acquirerqincurs to affect a business combination are not ppart of theconsideration paid. These costs are to be accounted for separately from the business combination.o Costs include direct payments to investment bankers, advisors, attorneys, appraisers and accountants.o Most of these costs will only affect the first year with noticeable impact on earnings and on thefinancial projections used to model the deal. Most restructuring costs intended to achieve synergies (plant closings, severance payments and goldenparachutes, etc.) will be expensed after closing.o Benefits will be received in the future,future if at all.all Costs are expensed when incurred, except debt and equity issuance costs. The acquirer’s reimbursement of amounts paid by the acquiree, or by its former owners, for acquisitionqshould also be accounted for separatelypy from the business combination.related costs of the acquirero These costs are incurred primarily for the benefit of the acquirer rather than the acquiree, or itsformer owners, and therefore are not part of the business combination transaction. Investor expectations must be managed.o Companies must explain the nature and amount of deal-related costs, as these costs directly affectnet income and EPS.42

Contingent Consideration The value of the consideration transferred (p(purchase pprice)) includes the acquisitionqdate fair value of anyycontingent consideration. Contingent arrangements of the acquiree assumed by the acquirer will also be measured at fair value.These unresolved contingencies from prior acquiree transactions can also have a material impact onearnings volatility of the acquirer. Contingent consideration will take the form of either:o The right to a return of previously transferred consideration is classified as an asset.o The obligation to pay additional consideration is classified as either a liability or equity.equity A contingency classified as an asset or a liability will be adjusted to fair value at each reporting datethrough earnings. g y classified as equityq y will not be re-measured. The settlement of the contingencyg y will beA contingencyaccounted for within equity. Counter-intuitive accounting treatment and potential riskso If the initial fair value measurement of the earn-out is less than the actual payment, then a loss isrecordedd d ini theh incomeistatement upon theh occurrence off theh payment, even if theh bbusinessiperformed better than originally expected.o If the initial fair value measurement is greater than the actual payment, then a gain is recorded in theincome statement, even though the business is performing worse than originally expected.43

Leases: Operating, Capital Or Failed/Sale Lease-Back Recognition of operating leases (normally applies to real property)o The acquirer recognizes an intangible asset if the terms of an acquiree’s lease are favorable (belowmarket) as of the acquisition date. Asset would require amortization.o The acquirer recognizes a liability if the terms are unfavorable (above market) as of the acquisitiondate. Liability is additional consideration. RecognitionRi i off capitali l leasesl((normallyll appliesli to personall property))o Asset would be fair-valued as of the acquisition date. Step-up would not be uncommon (10%-40%?). Similar for owned personal property & inventory Failed/sale lease-backo Determination that operating leases were incorrectly classified by the acquiree Asset would remain on acquirer’s balance sheet, and the lease obligation would be classified asa liability. This is a major issue and could affect debt covenants. Potential riskso UnexpectedUd increasesii amortization,ini i depreciationdi i andd liabilitiesli bili i are common.o Fair value determination can be a lengthy process, causing issues with debt covenants.44

In-Process Research And Development (IPR&D) Tangible and intangible assets used in R&D are recognized at their acquisition date fair values and are notimmediately charged to expense, regardless of whether they have any alternative future use in anotherR&D project. This is a change in previous accounting treatment. Considered an indefinite-lived asset (no amortization) until project is completed or abandonedo Amortized once completedo Write-off if abandoned Acquirer would determine the useful life of the intangible asset on the completion of the R&D efforts. Costs incurred and assets acquired after the acquisition date are expensed as incurred, if used in R&Dactivities with no alternative future use. CarefulC f l determinationdi i must beb maded as to theh existenceioff IPR&D.IPR&Do In any case, acquirer will either amortize the asset or impair the asset in future periods.45

Deferred Revenue Involves transactions where a pproduct or service has been sold,, but not yyet delivered Deferred revenue is typically associated with the sale of:o Technology licenseso Service and maintenance agreementso Implementation agreementso Work under contract with associated retainers LargeLr transactionstr n ti n in whichhi h theth acquirerq ir r hash multiplem ltipl LOB cann resultr lt in numerousn m rd f rr ddeferredrevenue accounts requiring valuation. Does a legal performance obligation exist?o If Yes FV the liability based on discernible costs to complete plus a normal profit margino If No the acquiring company should not recognize a liability as of the acquisition date This can significantly reduce future revenue, with adverse consequences for EDITDA andEPS projections.46

Defensive Assets A defensive asset is one the buyery does not intend to activelyy use but rather intends to pprevent others fromusing by withholding the asset from the marketplace. This is done to prevent competition or to enhancethe value of an existing asset. A common example of a defensive asset is an acquired brand that an entity may plan to use for atransition period, before rere-brandingbranding the product to its own.o The buyer then “locks up” the acquired brand and will not make it available for others to use. Buyerremoves a competitor and hopes to increase its own market share. Acquirer’s intentions do not influence the fair value estimate. Assets are measured using market participantassumptions.o Acquirers will need to consider the direct and indirect incremental cash flows created by withholdingthe asset from the marketplace in ascribing value and determining the economic life of the asset. Initial measurementmeas rement of defensivedefensi e assetso Acquirer’s determination of how a market participant would use an asset will have a direct impact onthe initial value ascribed to each defensive asset. Therefore, identifying market participants,developing market participant assumptions and determining the appropriate valuation basis arecriticali i l components ini developingd l i theh initiali i i l FV valuel measu

Dec 21, 2011 · PDF of the slides for today's program. Double click on the PDF and a separate page will open. . (ASC) ASC 805 (business combinations) ASC 350 (goodwill and intangible assets) ASC 360 (accounting for the impairment or disposal of long-lived asset)ts) ASC 740 (income taxes) 25.

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1.1 OPN on Design and Review of Funding Requests (2020-2022 Allocation Cycle) 1.2 Operational Procedures on Design and Review of Funding Requests (2020-2022 Allocation Cycle) 1.3 OPN on Make, Approve and Sign Grants (2020-2022 Allocation Cycle) 1.4 Operational Procedures on Make, Approve and Sign Grants (2020-2022 Allocation Cycle)