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. Although M&A activity slowed in the first nine months of 2017 compared to 2016, valuation multiples have continued to rise and major stock market indices marched steadily higher. According to Pitchbook, some investors in the U.S. may be waiting on more clarity around potential tax reform before pursuing deals, pushing more transactions into 2018. Some of these will likely require preliminary allocation disclosures prepared in the coming months.

Why Preliminary Allocation Is Important

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 evaluation 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.

Related Links

• A Guide to Reviewing a Purchase Price Allocation Report
• $475 Million Bargain Purchase Leads to an SEC Settlement 
• Q&A: New Guidance on Valuation of Contingent Consideration (Earnouts)