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Purchase Price Allocation - ASC 805

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In 2009 Financial Accounting Standard Board introduced the Accounting Standard Codification, which superseded most of the existing U.S. GAAP codification. As part of these standards, SFAS 141R was codified as ASC 805, which became effective for accounting business combinations.

ASC 805 requires that all the consideration transferred must be measured and reported at fair value as of the acquisition date. The first step as part of the ASC 805 exercise is to identify intangible assets held by the acquired entity, such as tradename, trademark, non-compete agreements, domain names, customer lists, technology, etc. Thereafter, the fair value of all these intangible assets is allocated among the purchase consideration.

In certain instances, purchase consideration may include contingent consideration. Typically, this contingent consideration or earnouts are based on either projected financial or operating metrics of the acquired entity. To estimate the fair value of contingent consideration, either a scenario-based model or a Monte Carlo-based simulation method may be utilized.

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