I’ve seen schweser explain the goodwill in a purchase as the excess of purchase price over pro rata share of BV minus amount allocated to PPE. But can there be allocations to other accounts as well besdies PPE? For example, the allocation to PPE happens if the BV is 100 but the MV is 105, so you allocate 5 to PPE before arriving at your goodwill? But what about allocations to inventory, fixed assets, inventory, etc.
Allocation can be made to anything that is purchased for price higher than book value. PPE=Fixed assets Some can be allocated to inventory (but that’s pretty small in most cases) AR, cash are at MV so can’t allocate anything to them. I think the main focus is on PPE cuz book values are usually much lower than market values (think of building bought 30 years ago and depreciated for 30 years, it’s book value might close to nothing, while market value is much larger)
it can be allocated to any “net tangible asset”, or as long as you paid more than tangible asset - tangible liability after, adjusting the value of course, you have good will. tangible asset can be anything really, just remember to leave good will out. I remember there is a question like this in schwsser exams.
What about identifiable intangibles? Can they be allocated to that if they somehow increase in value (such as a brand name)?
my guess is you can because intangible assets such as patents, franchises etc. are amortized so MV can be BV. can someone confirm? cfa no life, thanks for your help, that made it very clear
can anyone please confirm if identifiable intangibile assets, if fv > bv, would get some of the excess of purchase over book allocated to them? thanks.
the correct answer is it can be allocated to any identifiable asset, tangible or intangible. if can go to intangible asset like IPR&D and patents, just not good will because good will is meaningless without the purchase transaction where it was created. ignore original good will from the target, use the identifiable asset, then compute teh new goodwill