How to model 338(h)10 elections on pro forma balance sheet

In a 338(h)10 Transaction:

How do you go about allocating the excess purchase price over book value (net asset value) that used to be goodwill? Would you just reasonably allocate across all assets that can be depreciated or do you create a new asset category that will be depreciated against? Thanks for the help!

 
Best Response

Not sure i understand exactly what your question is asking for. Are you asking that when you're doing the purchase price allocation, what do you do with the existing (i.e. the target's existing goodwill), or are you referring to how you handle the excess amount (purchase price - book value)?

If it's the former, then you treat the existing GW as having a market value of 0 and thus you're effectively reducing the newly created GW (from the 338(h)(10) transaction) by the amount of the existing GW.

If you're talking about how to handle the excess amount that results from the purchase price - book, then yes, you step up each asset to its market value effectively reducing the newly created GW. Also, keep in mind, the spread between the MV and book would needs to be accounted for in your future depreciation/amortization (based on the appropriate term). Also, by doing this, you're likely to create some DTLs in subsequent years because for tax purposes, the depreciation period for the intangibles (including GW) that you're recording at market value are getting depreciated over 15 year for taxes (per section 197) and might not be 15 years for book purposes. Hope this helps.

 

Cool. I was talking about the second part (how to handle the excess amount that results from purchase price)...But when you do the transaction you don't really know what part of the excess should be allocated to what asset. Its not like you would know that the 100 over book that you are paying for xyz co should be allocated to PPE and not intangibles (identifiable) right? How do you itemize these allocations? Thanks for the clear quick response btw

 

Yeah so this is where you're stuck. You have to go by management's estimates of market value to determine the figures. If you're valuing a potential target and don't have the management market value it's definitely more difficult. If it's something like PPE, say a property, you can easily just reasearch similar properties in the area to get an idea of the MV. Other things might be more difficult to determine though and you'll have to build out models/some assumptions to figure it out. Ultimately, you just need to come up with a way to determine the most approximate market value for the assets to then determine what amount of the GW is allocate where. I wish I could give you better advice but it's really going to be a asset by asset decision.

 

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