Early Purchase Price Allocation Estimates Help Avoid EPS Surprises

For public companies, it is increasingly necessary to disclose a preliminary allocation of purchase price in the 10-Q or 10-K immediately following the closing date. The value of worldwide M&A increased 36% in the first quarter of 2014, according to data released by Thomson Reuters (net of competing bids for Time Warner Cable and SFR). The increase in transactional value was the strongest since 2011, though the deal count fell by 10%. Even if only a portion of these deals ultimately close, there will be quite a few preliminary allocation disclosures prepared in the coming months.

While ASC 805 permits companies up to one year to finalize and true-up the allocation, it is often the case that a preliminary allocation disclosure includes a full list of identified intangible assets, estimated fair values, and useful lives. Why is this preliminary allocation important?

• The accounting for goodwill and intangibles drives future amortization expense, which affects earnings per share. The split between amortizable and non-amortizable value can materially impact forward EPS.
• Nobody likes surprises. A hastily prepared preliminary allocation may underestimate the value of certain intangibles, or worse, fail to initially recognize certain intangible assets that might have been discovered during a more thorough valuation process.

At Mercer Capital, our public company clients increasingly look to us for guidance before a deal is executed. We assist management in identifying the likely intangible assets and estimating preliminary ranges of fair values. This can help support future earnings guidance (both internally and externally), as well as provide valuable insight into the proposed transaction.

The time to begin estimating the impact on EPS from intangible assets is before a deal closes, not the week before the audit or quarterly filing is due. Mercer Capital has extensive experience in assisting both public and private companies with these issues in all phases of the transaction process. Call one of our professionals today to discuss your financial reporting needs in confidence.