Discussion:Purchase of a service business

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Discussion Forum Index --> Accounting Questions --> Purchase of a service business

16horsepower (talk|edits) said:

29 October 2009
My very first question  :) I am working with a new client who is in the process of purchasing a service business where the majority of the purchase price will allocated to goodwill and paid as a percentage of revenue over the next 4 years. My question is how to account for this portion of the purchase price since the exact amount, at the time of purchase, will be unknown.

Jerrykern (talk|edits) said:

29 October 2009
If you're talking GAAP and not tax, the purchase price to be allocated includes estimates, made at the purchase date, of the fair value of potential future payments, which may result in earn out liabilities in your case. As the contingencies are resolved, the differences flow through earnings. Take a look at SFAS No. 141(R), or - oops - ASC 805-30-25-5.


I'd take a hard look at whether or not goodwill is really the majority of the price. Were there not intangible assets, like customer relationships, or intellectual property?

Kevinh5 (talk|edits) said:

29 October 2009
Jerry, I thought that 'customer list' WAS part of goodwill.

16horsepower (talk|edits) said:

30 October 2009
Kevin, I was under the impression that the customer list was part of goodwill as well. Regardless, Jerry, you have pointed me in the right direction. Thanks much for your response fellas.

Jerrykern (talk|edits) said:

30 October 2009
A customer list may or may not meet the separability criteria for intangible assets, but if it is allowed to be sold (e.g. no confidentiality agreements that limit its distribution), it should probably be segregated and amortized. Note that my example was "customer relationships" which, in GAAP, are different, and may be separable because they are often as a result of contractual relationships and rights. Perhaps you were thinking of "assembled work force" which is frequently valued as a step in valuing separable stuff, but isn't in itself separable from goodwill?

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