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ARXIS - Litigation Consulting
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February 2021

Recent Case:

Purchase Price Allocation

purchase price


A competitor business purchased 100% of the outstanding stock of a successful closely-held business. The business effect of the combination capitalized on synergies that would have been dormant had the businesses not joined forces. Shortly after the transaction was completed, the buyer's auditors informed management that GAAP standards required an independent valuation report allocating the purchase price between tangible and intangible assets.


When a business is acquired, accounting rules dictate how the transaction is to be disclosed for financial statement purposes. FASB ASC Topic 805 - Business Combinations (ASC 805) is the definitive guidance on business combinations for reporting all items related to the transaction in financial statements. ASC 805 is a comprehensive guideline for establishing the principles and requirements for how an acquirer recognizes and measures identifiable assets, recognizes and measures either goodwill or gain from a bargain purchase, and the disclosures to be made in the financial statements.

Arxis Financial work:

First, even though a transaction just took place, the entire business enterprise must be valued under the specific guidelines of ASC 805. This is in recognition of the concept that price, value and proceeds are potentially very different. It is common for the enterprise valuation under ASC 805 to present a different value than the actual purchase price. This has to do with the potential for different standards of value in play during the deal than required under generally accepted accounting principles.

In this case, the buyer financed the purchase price with cash, preferred stock, notes, and assumption of debt. All those elements, particularly the preferred stock, presented complex valuation issues. Historical data was barely looked at during the transaction negotiations since the driver of the deal was the potential synergy of the combined operations. Therefore, the enterprise valuation under ASC 805 was prepared based on those projections. An enterprise value was determined using a Discounted Cash Flow approach which was supported and consistent with the results of using the market approach (private company transactions).

Once the enterprise value was determined, an allocation to tangible asset value was made and the remainder was, of course, intangible value. ASC 805-20-25-10 requires that, "The acquirer shall recognize separately from goodwill the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable." Extensive work was done to determine those intangible assets that met the criteria for identification and valuation, and then to apply the appropriate valuation methodology to placing a value on customer and vendor relationships, patents, trademarks, non-compete agreements, and employment agreements.


A valuation report was issued (several hundred pages) and reviewed extensively by the auditors and their in-house valuation experts. The report was accepted without change and financial and tax reporting of the transaction was prepared based on the Arxis Financial valuation report.

Service Profile:

Forensic Accounting Services for Inventory Losses

Inventory losses can have a major impact on a company's operations and profitability. When inventory loss does incur, whether due to financial statement fraud, misappropriation or other means, forensic accounting is often the first step to uncover the full extent of damages.

In such cases, clients hire the trained specialists in Arxis Financial's "Forensic Accounting" practice to assist in determining the monetary loss or damages and to help uncover how the loss occurred.

Forensic accounting, by its nature, involves actual or anticipated disputes or litigation. Our specialists have extensive experience in presenting and defending our findings in litigation proceedings, including depositions and trial at local, state and federal court levels, as well as mediation and arbitration. We assist attorneys in interpreting the valuation, and help counsel to understand and analyze events or issues. This level of support can be a key asset in determining a legal strategy as well as reaching a reasonable and efficient conclusion.

If you have any questions about Forensic Accounting Services for Inventory Losses, please feel free to contact us.

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Chris Hamilton, CPA, CFE, CVA
Chris Hamilton, CPA, CFE, CVA
(805) 342-0749
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