In a Purchase Price Allocation (PPA) process, certain assets are considered to be subsumed into the calculation of goodwill. These assets are typically not separately identified or measured in the valuation process, and their values are reflected indirectly in the determination of goodwill.
While the specific assets subsumed to goodwill may vary based on the circumstances of the acquisition and the applicable accounting standards, here are some common examples:
1️⃣ Assembled Workforce: The skills, expertise, and experience of the existing workforce that contribute to the success of the acquired business. Favorable relationships with employees that contribute to the ongoing operations and customer relationships of the business. This human capital is challenging to quantify separately and can be a part of goodwill.
2️⃣ Synergies: The anticipated benefits from the combination of the acquired business with the acquirer’s existing operations, which might lead to cost savings, increased market share, revenue growth opportunities, or operational efficiencies may contribute to goodwill.
3️⃣ Non-contractual relationships: Non-contractual relationships with suppliers and customers that contribute to the future growth and profitability of the business.
4️⃣ In-process research and development (IPR&D): Any IPR&D projects acquired as part of the business combination that have not reached technological feasibility and do not meet the criteria for separate recognition as intangible assets are generally included in the calculation of goodwill.
5️⃣ Future Growth Potential: The value attributed to the acquired business’s ability to continue its operations as an ongoing concern along with the anticipated growth and future potential of the acquired company that can’t be attributed to specific identifiable assets might contribute to goodwill.
It’s important to note that the determination of which assets are subsumed to goodwill in a PPA depends on the specific circumstances of the acquisition and the applicable accounting standards.
