FASB 141 / 142 / 144

Whether working in bankruptcy and reorganization, on a FASB 142 Purchase Price Allocation (PPA) assignment or merger and / or acquisition, we see a broad range of intellectual assets in the form of intellectual property and intangibles. Whether it is a merger or a bankruptcy there is impact on the deal by these intellectual assets. There are three key questions: Which of these assets have value? Which of these assets could be lent against? And, third, how much do we lend?

Intellectual assets can have a big impact on EPS after an acquisition in a recent case where there was $2 billion excess price attributed to identified intangible assets and IP, this resulted in a $140 million a year amortization, thus basically wiping out the earnings of the acquiring company. On the other hand, however, the underlying value was there and available for securitization to ensure that the deal was consummated. At the opposite end of the spectrum, we identified and helped securitize the patents, technologies, chemical portfolio, trademarks and brand assets for Polaroid. Essentially we helped ensure the successful sales and survival of Polaroid, rather than what had been presupposed to be an impending liquidation. In a sense, we participated in saving the company by valuing these intangible assets.

The new FASB 141 / 142 Rule has a major impact on the importance of intangible assets. The purchase price allocation exercise or PPA calls on the valuation house to identify all intangible assets with definable lives, to then value those assets with definable lives, and to then depreciate these assets over the remaining useful life estimated by the valuator. How does the value of IP affect a merger? It can have a substantial impact. Can the PPA effect earnings per share? Cash flow? Is the PPA valuation different from fair market value? The answers are yes, yes and yes. The purchase price allocation can result in a substantial decrease in earnings per share once the companies are combined. However, it will have little effect on actual cash flow. Finally, the SEC definition for fair value as defined under FASB 141 / 142 / 144 is very different from what we traditionally think of as market value.

Clients:  Egg.com, MBNA, Standard & Poor's, The Blackstone Group, Eurotel

Related Article: "Intellectual Capital: Understanding the Value and the Risk"