Apogee Business Valuations, Inc.

Business Combinations
(SFAS 141)

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 141 Business Combinations which requires that all business acquisitions be accounted for by using the purchase method of accounting. The pooling of interest method is no longer permitted.

Application of the purchase method requires identification of all assets of the acquiring enterprise, including both tangible and intangible assets. Any excess of the cost of an acquired entity over the net amounts assigned to the tangible and intangible assets acquired and liabilities assumed are classified as goodwill.

SFAS 141 requires the fair value of acquired tangible and intangible assets to be estimated. The definition of fair value as stated in SFAS 141 is:

The amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

An intangible asset is recognized as an asset apart from goodwill if it arises from contractual or legal rights, such as a patent or trademark, or if it is separable, such as if it can be sold, transferred, licensed, rented or exchanged (either separately or if it can be paired with a related contract, asset or liability).

The FASB has classified intangible assets into five categories; 1) marketing-related, 2) customer-related, 3) artistic-related, 4) contract-based, and 5) technology-based. An assembled workforce is categorized within the components of goodwill because it fails the separability and transferability test.

Intangible assets which have an identifiable useful life must be identified and separated from intangible assets which do not have an identifiable remaining useful life. The residual is goodwill which is subject to a two-step test for impairment under SFAS 142 Goodwill and Other Intangible Assets.

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