Valuation for Financial Reporting : Fair Value Measurements and ...

38 Valuation for Financial ReportingRecommended financial statement disclosure includes but is not limited to theidentification of the following by the acquiring company:A description of the projects to which value was ascribed, including the status ofthe projectThe values assigned to each of the assets acquired, including the amount of the inprocessR&D chargeThe techniques used in each acquisition to value assets acquired to be used inR&D activitiesThe key assumptions used in valuing the assets acquired to be used in R&Dactivities, such as: The time frame for cash flows expected to be realized The weighted average discount rates used in determining present values 39Cost should be assigned to all identifiable tangible and intangible assets, includingany resulting from R&D activities of the acquired company or to be used in R&Dactivities of the combined enterprise. The acquiring company should allocate aportion of the purchase price to each acquired identifiable intangible asset thatpossesses either of the following characteristics:Produces cash flows that are largely independent of cash flows generated by otherassetsCould realistically be licensed, sold, transferred, exchanged, or disposed of in atransaction in which it is the only asset 40For the purpose of valuation, cash flows should be allocated to each intangibleasset on an as-if-separated basis, representing the typical cash flow carve-outs andreturns on and of charges in the multiperiod excess earnings model. Importantly,synergistic value only to the buyer may not be attributed to an acquired identifiableasset. Thus, buyer-specific synergistic value falls into goodwill, which is calculatedon a residual basis. As stated in the IPR&D Practice Aid:A willing buyer may factor into the amount that it would pay to acquire theseller’s business a portion of the incremental cash flows that are expected to inureto the benefit of that buyer. The incremental cash flows may include those resultingfrom strategic or synergistic components. If the buyer pays the seller any significantconsideration for strategic or synergistic benefits in excess of those expected tobe realized by market participants, the valuation specialist would identify thoseexcess benefits and remove them from the valuation of assets acquired. Thus, the costof the acquired company may include an element of synergistic value (that is,investment value). However, for purposes of assigning cost to the assets acquiredin accordance with FASB Statement No. 141, the amount of the purchase priceallocated to an acquired asset would not include any entity-specific synergisticvalue. Fair value does not include strategic or synergistic value resulting from