According to Statement of Accounting Standards (“SFAS”) 141R (also known as Accounting Standards Codification (“ASC”) 805, which addresses accounting for business combinations, the acquisition of a business will require a purchase price allocation. This means that the purchase price of a business must be allocated among various categories including tangible assets, intangible assets, liabilities, and goodwill at the time of the business combination, in order to set the basis for future depreciation and amortization of the combined balance sheet assets and liabilities.
While some acquiring companies will opt to conduct their own purchase price allocations for the companies that they acquire, in most cases their accounting departments lack the specialized knowledge and understanding of asset valuation principles to be able to conduct these allocations in-house with enough rigor to pass muster with their auditors.
In a general sense, appraisals conducted for the purpose of purchase price allocations must consider three separate methods of determining value. The first method, called the Income Approach, considers the revenue that can be assigned to a specific asset or group of assets. The second method, called the Market Approach, considers the fair value of the exact same asset in a free and open market place, in an arm’s length transaction, where the seller is under no compulsion to sell and the buyer is under no compulsion to buy. The third and final method, called the Cost Approach, considers the cost to reproduce the asset from scratch, with adjustments made to reflect the asset’s age and condition. Both tangible and intangible assets can be valued using one or a combination of these methods, although the income approach is often not used when valuing discrete assets within a larger enterprise, because it is often extremely difficult to assign a revenue stream to a particular asset.
When hiring an appraiser to perform a purchase price allocation, it is usually best to hire one with experience in the specific industry of the subject property. This helps to ensure that the appraiser is able to most accurately utilize the three approaches to value described above, as well as helping to ensure that the appraiser is familiar with the assets that really do have value and is familiar with the market forces that drive that value. In this sense, broadcasting and telecommunications properties pose complex challenges when performing asset allocation appraisals.
On the tangible asset side, broadcasting and telecommunications properties typically have large numbers of valuable, complex, and highly specialized technical assets. These assets can include transmitters, broadcasting antennas, towers, highly customized vehicles capable of sending and receiving satellite and microwave transmissions, weather radar and graphics systems, high-capacity video storage and playback systems, and many other things. In many cases, because of the constant development of newer technologies or because of the changing regulatory environment, the value of these assets can fluctuate significantly over time.
The valuation of intangible assets at broadcasting and telecommunications properties can be even more complex and specialized than the valuation of tangible assets. Some intangible assets, such as talent contracts, favorable leases, income leases, advertiser relationships, and trademarks and trade names have similar analogs in other industries. However, other intangible assets such as FCC licenses, network affiliation agreements, and retransmission agreements can have significant value, but are absolutely unique to the broadcasting and telecommunications industries.
Finally, after the tangible and intangible assets have been valued, the difference remaining between the identified assets and the purchase price of the entire business is considered to be “Goodwill”. Goodwill is considered to be a representation of the economic benefits that arise from assets in a business combination that cannot be individually identified and recognized.
Through its 25 years in the business of conducting asset allocation appraisals for business combinations, Bond & Pecaro has developed many methodologies that both produce extremely accurate opinions of value, as well as being able to withstand auditor scrutiny.
In a typical situation, Bond & Pecaro will conduct a highly detailed examination and inventory of the acquired property. At the same time, interviews will be conducted with engineering and management staffs in order to ensure that all appropriate assets and liabilities are captured, and in order to ensure that any hidden features that may add to or detract from the value of these assets and liabilities are taken into consideration.
When these inventories and interviews are completed, each individual asset is categorized and valued according to the three methods of determining value discussed above. The resulting report involves a detailed description of the marketplace and economic factors in which the acquisition is taking place, a discussion of the definitions for each asset category, a discussion of the methods used to value each category, and a summary of the condition and other factors that may affect the value of each asset category.
Through asset allocation appraisals, Bond & Pecaro is able to assist its clients in making accounting sense of complex business combinations. In particular, when combining the balance sheets of two or more entities, an asset allocation appraisal will help to ensure that the resulting consolidated balance sheet is as accurate and useful as it can possibly be.