Purchase Price Allocation

What is ASC 805 Purchase Price Allocation?

ASC 805 – Business Combinations requires companies that acquire another business to allocate the purchase price to the identifiable assets acquired and liabilities assumed. This is known as a Purchase Price Allocation (PPA) and is performed under the Acquisition Method, as required by U.S. GAAP.

Under the acquisition method, companies must:

• Identify and measure all tangible and intangible assets acquired.

• Measure liabilities assumed.

• Record the difference between purchase consideration and net asset value as goodwill or bargain purchase gain.

This process must reflect the fair value as of the acquisition date, in accordance with ASC 820 – Fair Value Measurement.

Why You Need an ASC 805 Valuation

An ASC 805 valuation is required when:

• You’ve acquired a controlling interest in another company.

• The acquisition qualifies as a business combination under GAAP.

• You are preparing GAAP-compliant or audited financial statements.

Without a proper PPA valuation, you risk:

• Material misstatements of goodwill and intangible assets

• Audit pushback or delays

• Non-compliance with SEC or lender reporting requirements

• Future goodwill impairments from inflated allocations

A qualified ASC 805 valuation ensures transparent, accurate, and audit-ready reporting.

Common Valuation Methods Used in ASC 805

Accurate PPA reporting requires applying valuation methodologies appropriate to each class of asset, based on market participant assumptions.

Here are the most commonly used methods:

1. Relief-from-Royalty Method (Trade Names and Trademarks)

This income-based approach estimates the value of trade names and trademarks by:

• Estimating hypothetical royalty rates a market participant would pay to license the asset

• Applying those rates to projected revenue streams

• Discounting the royalty savings to present value

It’s widely used for brand-related intangible assets where continued use is expected post-acquisition.

2. Multi-Period Excess Earnings Method (MPEEM) for Customer Relationships

The MPEEM is used when the asset being valued (e.g., customer relationships) contributes uniquely to cash flows.

This technique:

• Projects future revenue and margin from the existing customer base

• Deducts contributory asset charges (CACs) for assets like workforce and technology

• Discounts the net cash flows to present value

MPEEM is the preferred method for valuing customer relationships when those relationships drive recurring or long-term revenue.

3. Distributor Method (or Residual Profit Split)

This method is commonly used to value customer relationships in distributor-based or sales channel businesses.

It involves:

• Estimating the typical earnings of a market-based distributor

• Applying those margins to forecasted revenue

• Discounting to present value

This approach may be more appropriate than MPEEM when customer loyalty is indirect, or the acquired company functions as a pass-through or channel-based sales model.

4. Cost Approach for Assembled Workforce and Internally Developed Software

In some cases, a reproduction or replacement cost approach is used, particularly when market-based or income-based methods are not appropriate.

Examples:

• Assembled Workforce (often disclosed but not recognized) may be valued using estimated hiring and training costs.

• Internally developed non-revenue-generating software may be valued using historical or estimated development costs.

How Wyckoff Valuation Delivers Audit-Ready ASC 805 Reports

At Wyckoff Valuation, we prepare comprehensive, audit-defensible ASC 805 valuations using best-in-class methodologies tailored to each unique transaction.

Why clients choose us:

• 30+ Years of Experience – Trusted by Big 4 auditors, acquirers, and private equity firms.

• Fixed-Fee Pricing – Transparent pricing based on deal complexity. No surprise hourly rates.

• Methodologically Sound – We apply Relief-from-Royalty, MPEEM, and other methods consistent with ASC 820 and AICPA guidelines.

• Detailed Documentation – Full support for every valuation input, assumption, and model.

• Responsive Support – Direct access to senior professionals for questions from management, auditors, or regulators.

What It Costs

We offer fixed-fee pricing tailored to the size and complexity of your transaction:

• Simple Acquisition (Limited Intangibles): Starting at $1,800 - $2,500

• Complex Business Combination (Multiple Intangibles / International Components): Starting at $2,500 - $7,500

Our ASC 805 PPA services include:

• Complete fair value measurement of acquired identifiable intangible assets

• Valuation of intangible assets using industry-standard methods

• Goodwill calculation and reconciliation

• Management interviews and data review

• Full support during audit and financial reporting

Frequently Asked Questions

What triggers an ASC 805 valuation?
Any acquisition that meets the definition of a “business” under GAAP triggers ASC 805. Stock purchases, mergers, and certain asset deals may qualify.

How is goodwill calculated?
Goodwill equals the purchase price minus the fair value of identifiable net assets. It represents future economic benefits that are not separately identifiable.

Which intangible assets are typically valued?
Common assets include customer relationships, developed technology, trade names, non-compete agreements, assembled workforce, content, know-how, patents, and above- / below-market leases.

How long does the process take?
We typically deliver ASC 805 reports within 2–4 weeks, depending on the complexity and responsiveness of the client.

Get an ASC 805 Valuation You Can Trust

Don’t risk audit delays, goodwill impairments, or non-compliance.

Wyckoff Valuation delivers ASC 805 purchase price allocation reports that are accurate, supportable, and prepared by senior valuation professionals.