Internal Control of Fixed Assets: A Controller and Auditor's Guide

CHAPTER NINE 9

Fixed Assets in a Business Combination

CURRENT ACCOUNTING RULES SPELL out in detail the requirements for a buyer to allocate the purchase price based on the fair value of each acquired asset. This is sometimes called a purchase price allocation (PPA). In this book we can only cover the aspects of a PPA that deal with Property, Plant, and Equipment (PP&E). Valuation of intangibles is covered in detail in the author’s book Executive’s Guide to Fair Value.¹

The basic accounting rules for all PPAs are covered in Accounting Standards Codification (ASC) 805-20-30-1 which provides:

The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.

As can be seen, the key words are “acquisition-date fair values.” There is an absolute requirement, therefore, that the buyer of a target company determine the fair value of all PP&E owned by the target company as of the acquisition date. As will be discussed in this chapter, there are essentially two ways to meet this requirement.

1. The least expensive is simply to carry over the target’s net book value as the starting fair value of the asset.

2. The most accurate approach is to have the PP&E valued by a valuation specialist. In turn, valuation specialists sometimes apply cost indexes to the original cost, and in other cases actually determine the fair value using established valuation techniques.

The choice as to which ...