The Financial Reporting Blog

On April 8, 2014, the SEC charged CVS Caremark Corp. with misleading investors by failing to disclose certain financial setbacks and using improper purchase price allocation accounting that artificially boosted its financial performance. The SEC’s actions (and the resulting settlements) remind us that fair value matters often come under heavy scrutiny.

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. Preliminary allocation is important because 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. In addition, 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.