Net Identifiable Assets
The total value of a company's acquired assets
What is Net Identifiable Assets?
Net Identifiable Assets (NIA) is the total value of a company's acquired assets which recognizes future benefit towards the said company and can be measured at any particular point in time.
NIA's are calculated once a holding company merges, acquires, or combines with another business and gains that business' assets and liabilities.
When presenting an offer to buy out another company, assets, and liabilities are very important because they reflect the overall value of the transaction.
These assets can only be identified if a company can sell or dispose of them independently from all other assets it had been holding before obtaining the subservient company.
It is important to observe that:
- "Net" implies that the deducting of liabilities that come with the acquisition is being accounted for.
- "Identifiable" implies that both the tangible assets (e.g., rolling stocks) and the intangible assets (e.g., trademarks) are included.
Key Takeaways
- NIA is the total value of a company's acquired assets which recognizes future benefits towards the said company and can be measured at any particular point in time.
- Net Identifiable Assets are calculated once a holding company merges, acquires, or combines with another business and gains that business' assets and liabilities.
- Net Identifiable Assets allow the acquiring company to identify whether or not the acquisition created goodwill.
- NIA can be used in instances such as goodwill allocation, financial reporting, and evaluating liquidity.
- The formula for calculating NIAs is: Net Identifiable Assets = Identifiable Assets - Total Liabilities.
How Are Net Identifiable Assets Used?
When a company acquires another business or its assets, it becomes a parent or holding company, while the other company becomes a subsidiary or daughter company.
NIAs allow the acquiring company to identify whether or not the acquisition created goodwill.
The parent company may use NIA's in instances such as goodwill allocation, financial reporting, and evaluating liquidity.
Net identifiable assets allow companies to evaluate the Purchase Price Allocation (PPA) value, the price, amount of goodwill, or lack thereof, calculated in Mergers and Acquisitions (M&As).
NIA's are the total calculated company assets, which determine how the PPA will affect the foreseeable volume of goodwill.
To measure the identifiable assets, the holding company must assign PPA value to M&A. These assets play a big role in forecasting the advantages and disadvantages of business merging.
Calculating Net Identifiable Assets in the Real World
When calculating NIA's, it is essential to note that every company bears different factors. For example, let's generalize a parent company that acquires two smaller daughter companies around the same time.
One of the daughter companies, a manufacturer, creates a physical product. While the other daughter company, a web advertising company, provides a service.
The manufacturing company will have the majority of its value spring from machinery, inventory, property, and other physical assets making it more likely that its assets would be considered identifiable.
On the contrary, the web advertising company is less likely to have as many identifiable assets as its value is determined by future potential revenue.
Thus, the parent company will generate higher goodwill by acquiring the web advertising firm. That is why it's important to remember the spectrum of identifiable assets while calculating NIAs.
The formula for calculating NIAs is:
Net Identifiable Assets = Identifiable Assets - Total Liabilities
In this example of asset acquisition, a parent company will fully acquire a daughter company worth $100 million.
- Equipment and Machines: $50 million
- Product in Inventory: $25 million
- Cash and Bonds: $10 million
- Trademarks: $5 million
The holding company must assign fair market value (FMV) to all identifiable assets and liabilities, subtracting those liabilities from the identifiable assets to get the net identifiable assets.
At the time of the acquisition, the FMV of the daughter company's assets was $90 million.
Therefore:
Goodwill = $100 million - $90 million = $10 million
The parent company has paid a total of $10 million in goodwill, which means the acquisition price exceeded the total worth of the net identifiable assets.
Below is another example of how to calculate NIA:
(X) Purchase Price Paid by Acquirer: $40,000
(Y) Identifiable Assets: $29,000
(Z) Total Liabilities of the Acquired Company: $1,000
(Y - Z) = Net Identifiable Assets = $28,000
(X - Y - Z) = Goodwill = $10,000
Goodwill and Net Identifiable Assets
Goodwill is the intangible value a company holds beyond its tangible assets. Goodwill can arise from some of the following:
- Brand Reputation
- Customer Loyalty
- Skilled Workforce
- Market Share & Dominance
- Intellectual Property
As mentioned before, the formula for calculating goodwill is as follows:
Goodwill = Purchase Price Paid by Acquirer - Identifiable Assets - Total Liabilities of Acquired Company
When calculating Net Identifiable Assets, it’s crucial to account for the goodwill involved because it is recorded on the balance sheet as an intangible asset, and it is subject to periodic impairment tests to make sure that its value hasn’t declined.
NIAs represent the exact and quantifiable elements of an acquired company. This is important for acquiring companies to evaluate the financial position and potential of the acquired business it bought. A parent company needs to analyze potential daughter companies’ NIAs when acquiring and use it to analyze its expected future growth.
Publicly Traded Companies are required by law to provide detailed information about their goodwill and include any carrying amount, impairments, and key assumptions used in impairment testing.
Goodwill calculations are subject to subjective judgment in the accounting world. There could be subjective estimations of the fair value of NIAs and the purchase price allocations. This can lead to manipulation and inaccuracies of the intangible assets, liabilities, and PPA.
It’s best to use industry benchmarks to evaluate reasonable goodwill estimates.
Goodwill and NIAs are handled by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), and continuous work is done to converge uniform accounting standards for measuring goodwill and NIAs.
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