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

62 Valuation for Financial Reportingthe fair values of liabilities incurred by an acquiring entity. 3 This adjusted purchaseprice may be alternately defined as the sum of all cash and stock paid, debt incurred,and liabilities assumed. In this example, the enterprise purchase price is assumed to be$209,000,000 based on the following assumptions:Cash Paid * $150,000,000Liabilities Assumed **Current Liabilities *** 25,000,000Current Maturities of Long-Term Debt 4,000,000Long-Term Debt 30,000,000Adjusted Purchase Price $209,000,000*Including capitalized acquisition costs [will change under SFAS No. 141R]**Amounts stated at fair value***Excluding externally funded debtAs used here, the term adjusted purchase price equates to the total paid for all ofthe acquired company’s assets, and includes all payments and liabilities assumed. It isimportant to distinguish this measurement from the invested capital concept, which isdefined as the sum of debt and equity in an enterprise on a long-term basis, 4 shownhere as $184,000,000 ($209,000,000 $25,000,000).At this point, it is useful for the analyst to understand the overall magnitude of theintangible assets. This can be easily achieved by subtracting from the adjusted purchaseprice (or total asset value) the estimated fair value of the current and tangible assets. Ananalysis of the company’s balance sheet and asset records as of the valuation date revealsthe recorded or carrying value of the assets is $67,500,000, which consists of:Cash $1,500,000Marketable Securities 4,000,000Accounts Receivable 17,000,000Inventory 12,000,000Prepaid Expenses 3,000,000Land and Building 10,000,000Machinery and Equipment 15,000,000Organization Costs and Other Intangibles 5,000,000Total Current and Tangible Assets $67,500,000The next step is to adjust recorded values to fair values, including final auditedamounts, if available. In reality, separate valuations may be undertaken of materialtangible assets. For example, a machinery and equipment analyst may be brought in toindependently value the fixed assets if it is determined that (1) the fixed assets arematerial, and (2) the book values do not represent fair value. Similarly, the fair valuesof receivables and other current assets may not be reflected by their carrying value andmay require adjustment to fair value. For purposes of this analysis, it is assumed thatadjustments are required to certain asset accounts and that the fair values of cash,