Valuation insights: New rules for purchase price allocations

The new accounting standard FRS 102 requires that on a company or business purchase the separate intangible assets acquired should be identified and valued. With the first accounts under this standard now being prepared we can share our experience and insights into how these valuations are working out in practice.

Standards

For several years companies reporting under international accounting standards have needed to identify and value the intangible assets acquired in an acquisition. This requirement has now been extended to all but the smallest of companies in the UK under FRS 102. Previously, a single goodwill figure was reported as the difference between the purchase price and tangible assets acquired. Now that figure must be split into separate assets such as trade-names, customer relationships, patents, etc. Any company that has made an acquisition since 1 January 2014 that reports under FRS 102 will need to carry out this identification and valuation exercise.

Valuation results

We have now completed the first tranche of intangible asset valuations for FRS 102 reporting purposes, making this firm one of the first in the country with experience in this specialist area.

While there is considerable variance in the types and values of intangible assets depending upon industry sector and company-specific characteristics, we have identified some trends:

  • The most commonly identified primary intangible assets are tradenames and customer relationships.
  • Intangible assets and goodwill have accounted for an average of 60% of the purchase price of the deals analysed, with a range of some 40% to 70%.
  • On average, three primary intangible asset categories are identified and valued, plus goodwill.

Scrutiny

Following the introduction of the international accounting standard covering the valuation of intangibles, the Financial Reporting Council was highly critical of the compliance (or lack of it) by companies and their auditors. We expect the UK’s regulatory and professional bodies to similarly scrutinise company accounts and the work of accountants to ensure proper compliance with FRS 102.

With our in depth technical knowledge and experience of intangible asset valuations for FRS 102 reporting purposes, we can help directors ensure compliance with this new accounting standard.

For further information about this subject please contact:

Simon Chapman

Corporate Finance Partner

M: 07831 255302

E: simon.chapman@burgisbullock.com

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