Early in my career I was often asked to assist auditors with reviewing in-house valuations of intangible assets acquired in business combinations. I often responded to these requests with a large sigh. Having been through this process before I knew many CFOs and controllers believed they could put together an intangible valuation. After all, many CFOs are skilled in valuing firms and building financial models.
Why Valuing Intangible Assets Requires Depth of Expertise
What CFOs and controllers did not realize is that the work required to value identifiable intangibles is academic in nature and relies upon many best practices that have been developed over time by a select group of individuals. In fact, within the valuation profession you will find two types of practitioners; those who perform purchase price allocations and those who do not. This is because the area of financial reporting has become so unique and specific that it is not worth keeping up to date on unless you do a substantial amount of work in this area.
That being said, there are still instances where performing an intangible asset valuation can be done in-house. Under the newly issued Private Company Counsel guidance (ASU 2014-18), firms can elect to simplify their intangible accounting. If this election is made, a company no longer has to recognize non-competition agreements or customer relationships, which are not capable of being licensed or sold from other assets of the business. Choosing this election will result in instances where the only identifiable intangible asset being placed on the opening balance sheet is a trade name. In instances such as this, we see little reason to engage a valuation professional to perform this work.
Should You Perform an Analysis In-house?
Some questions that need to be asked before determining whether to perform an analysis in-house are:
- How many reporting units will there be?
- What identifiable intangible assets exist?
- Will ASU 2014-18 be elected?
- Was contingent consideration issued as part of the purchase consideration?
- Was rollover equity part of the purchase consideration?
- How will the positions and approaches taken in this valuation affect the future financial statements?
The Most Important Question to Ask
While all of the questions above are important, the most important question to ask is, what does my auditor require? While best practices are quickly becoming solidified, we have found that different firms have different expectations. These differences relate to the risks determined by the audit team and the audit firm’s accounting policies. Understanding the auditor’s expectations before making a decision is critical.
Guidance To Go Forward
We have created the Valuation Financial Reporting Center to help assist companies in complying with the fair value requirements of U.S. GAAP. The resources found on this site should assist those looking to perform a financial reporting valuation in-house or to better understand the financial reporting requirements. If you have questions, please contact us to discuss your unique situation.