Sourabh Arora (Article) (109 Points)
25 October 2012
SUNILKUMAR WADHWANI
(Chartered Accountant)
(320 Points)
Replied 26 October 2012
PRINCIPAL-The total purchase price is allocated in proportion to the relative fair values of the assets acquired.
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It's not unusual for a group of assets to be acquired for a single sum. If these assets are indistinguishable, for example 10 identical delivery trucks purchased for a lump-sum price of $150,000, valuation is obvious. Each of the trucks would be valued at $15,000 ($150,000 ÷ 10). However, if the lump-sum purchase involves different assets, it's necessary to allocate the lump-sum acquisition price among the separate items. The assets acquired may have different characteristics and different useful lives. For example, the acquisition of a factory may include assets that are significantly different such as land, building, and equipment. |
The relative fair value percentages are multiplied by the lump-sum purchase price to determine the initial valuation of each of the separate assets. Notice that the lump-sum purchase includes inventories. The procedure used here to allocate the purchase price in a lump-sum acquisition pertains to any type of asset mix, not just to property, plant, and equipment and intangible assets.
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