Purchase Price Allocation and Negative Goodwill
March 1st, 2009 by Brian Alwine | Tags: FAS 141, Goodwill, Intangible Assets, Purchase Price Allocation | Posted in Intangible Assets |(Note: Names and amounts used in this case study have been changed to protect the innocent.)
The Problem:
Can a business purchased at a discount have intangible asset value? What happens to negative goodwill in accounting for a purchase?
The Background:
Acme Inc. paid $25 million cash for the operations, inventory, and equipment of ABC Co. The appraised value of ABC’s machinery and equipment alone was $35 million.
Clearly, this was a bargain purchase. It shows that on a going concern basis a business may sell for less than its liquidation value.
The Solution:
Management of Acme Inc. engaged us to assist them in their purchase price analysis. A careful look at the purchase agreements uncovered four identifiable intangible assets.
The difference in value between the acquired assets and the purchase price represents negative goodwill. Under current accounting standards, negative goodwill was allocated to the non-current assets on a pro rata basis.
| Assets Acquired | Fair Value | Allocated Value |
|---|---|---|
| Inventory | $5 million | $5 million |
| Equipment | $30 million | $15 million |
| Customer Contracts | $2 million | $1 million |
| Customer Relationships | $3 million | $1.5 million |
| Lease Agreement | $4 million | $2 million |
| Non-competition Agreement | $1 million | $0.5 million |
In this example, negative goodwill was $20 million. This is the difference between the purchase price of $25 million and the $45 million fair value of assets acquired.
Because negative goodwill ($20 million) was one-half the fair value of the non-current assets ($40 million), the “allocated” value recorded for each non-current asset was one-half of its fair value.
