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Certified Public Accountants
(805) 306-7890

Litigation Consulting


Forensic Accounting - Fraud - Business Valuation

April 2015

Recent Case:

Purchase Price Allocation


A competitor business purchased 100% of the outstanding stock of a successful closely-held business. The business effect of the combination capitalized on synergies that would have been dormant had the businesses not joined forces. Shortly after the transaction was completed, the buyer's auditors informed management that GAAP standards required an independent valuation report allocating the purchase price between tangible and intangible assets.


When a business is acquired, accounting rules dictate how the transaction is to be disclosed for financial statement purposes. FASB ASC Topic 805 - Business Combinations (ASC 805) is the definitive guidance on business combinations for reporting all items related to the transaction in financial statements. ASC 805 is a comprehensive guideline for establishing the principles and requirements for how an acquirer recognizes and measures identifiable assets, recognizes and measures either goodwill or gain from a bargain purchase, and the disclosures to be made in the financial statements.

Arxis Financial work:

First, even though a transaction just took place, the entire business enterprise must be valued under the specific guidelines of ASC 805. This is in recognition of the concept that price, value and proceeds are potentially very different. It is common for the enterprise valuation under ASC 805 to present a different value than the actual purchase price. This has to do with the potential for different standards of value in play during the deal than required under generally accepted accounting principles.

In this case, the buyer financed the purchase price with cash, preferred stock, notes, and assumption of debt. All those elements, particularly the preferred stock, presented complex valuation issues. Historical data was barely looked at during the transaction negotiations since the driver of the deal was the potential synergy of the combined operations. Therefore, the enterprise valuation under ASC 805 was prepared based on those projections. An enterprise value was determined using a Discounted Cash Flow approach which was supported and consistent with the results of using the market approach (private company transactions).

Once the enterprise value was determined, an allocation to tangible asset value was made and the remainder was, of course, intangible value. ASC 805-20-25-10 requires that, "The acquirer shall recognize separately from goodwill the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable." Extensive work was done to determine those intangible assets that met the criteria for identification and valuation, and then to apply the appropriate valuation methodology to placing a value on customer and vendor relationships, patents, trademarks, non-compete agreements, and employment agreements.


A valuation report was issued (several hundred pages) and reviewed extensively by the auditors and their in-house valuation experts. The report was accepted without change and financial and tax reporting of the transaction was prepared based on the Arxis Financial valuation report.


Upcoming Speaking Engagements for Chris Hamilton

Chris Hamilton's upcoming presentations include:


  • "Cost of Capital Implications in Damages and Business Valuation" presented to NACVA in Chicago, Illinois
  • "Standard of Value" presented to CalCPA at LAX, Los Angeles, CA


  • "Financial Ethics, Morality, and the Law" presented to Leadership Simi Valley at the Reagan Library in Simi Valley, CA

If you are interested in asking Mr. Hamilton to speak at your organization's upcoming meeting, please feel free to contact him.

Service Profile:

Business Valuation Services for Mergers and Acquisitions

The methodology for business valuations for mergers and acquisitions can be complex. Numerous issues are considered, including revenues, profits and cash flow; capital and working capital requirements; comparable deals; multiples; sales, earnings, EBITDA; book value and adjusted book value; purchase price allocation; etc. As such, M&A transactions require a knowledgeable and experienced valuation specialist.

The specialists in Arxis Financial's "Business Valuation" practice provide clients with a comprehensible valuation that carefully considers critical factors in the M&A context. We also have extensive experience in presenting and defending our findings in litigation proceedings. Our clients benefit from having valuation professionals who understand the realities of market valuations much better than the purely theoretical practitioners, resulting in very defensible and clear valuations. Our experts are well-known in the industry and highly respected for their depth of knowledge and resources.

The Business Valuation practice is headed by partner Chris L. Hamilton, CPA, CFE, CVA. Mr. Hamilton is a Certified Public Accountant, Certified Fraud Examiner, and Certified Valuation Analyst. Mr. Hamilton has published articles in several publications, and has made presentations at national conferences, training institutes and seminars on topics including forensic accounting, fraud and business appraisal.


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Copyright 2015 Arxis Financial. Articles may not be reprinted without permission.

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Chris Hamilton, CPA CFE, CVA
(805) 306-7890
@ArxisChris on Twitter

Arxis Financial Logo

Litigation Consulting

Forensic Accounting - Fraud - Business Valuation


Clients know us for results. Opposing counsel know Arxis for wishing they had hired us.