ROLE OF ASC 805 IN PURCHASE PRICE ALLOCATION

Purchase Price Allocation: When a company (acquirer) purchases another entity (target), it must allocate the purchase price to different assets and liabilities of the target as per accounting rules. 

Thus, Purchase Price Allocation is a method to identify the acquisition and assess the fair market value of its assets (tangible and intangible) and liabilities. The fair market value can be defined as the value a market participant would be willing to pay for the identified assets.

The amount left after the allocation of a purchase price to different assets and liabilities is allocated to goodwill.

To ensure purchase price allocation is done correctly, accounting standard guidelines that can dictate the requirements are needed. This is where ASC 805 standards can be helpful.

ASC 805 Valuation

Accounting Standards Codification (ASC) 805 is a modified version of the previous accounting standard known as FAS 141. The main difference in the new version lies in the treatment of contingencies. 

According to the newly established ASC 805, contingencies are calculated and listed on the date of the acquisition, while under FAS 141, they were dealt with after the agreement was finalized. Thus, ASC 805 is a user-friendly approach that makes information more accessible and understandable for all.

To date, GAAP rules governing business combination and acquisition have undergone modification and are known by various names such as FAS 141, FAS 141r, and more recently, ASC 805. In general, they can be referred to as purchase price allocation standards. 

ASC 805 is a broad concept and there are various sections that give guidelines for different types of acquisitions.

Asset Acquisition

Asset acquisition refers to the purchase of an asset or a group of assets that cannot be defined as a business. Therefore, such an acquisition is not as per the set definition of a business combination.

The accounting for these transactions comes under a subsection of ASC 805-50: Acquisition of assets rather than a business. The accounting for asset acquisitions is carried out using a cost accumulation model. 

Hence, the cost of the acquisition, including transaction costs, is allocated to the assets acquired on the basis of relative fair values, with some exceptions. This is completely different from the accounting of a business combination, which is performed using a fair value model. 

In this process, the assets and liabilities are accounted at their fair values, and the difference between the consideration paid, excluding the fair value of assets and liabilities and any transaction costs, is recognized as goodwill or, in unusual circumstances, a bargain purchase gain. 

As a result, there are differences between the accounting for asset acquisition and that for a business combination. Therefore, ASC 805 provides the framework required for the accounting of asset acquisition and is an important aspect of purchase price allocation.