Allocation and Fair Market Appraisals, ASC 805/IAS 40
The Fair Market Value and Allocation of Assets within a Business Combination
Business owners and buyers have numerous reporting obligations concerning the reporting of fair market value, including ASC 805 or International Accounting Standards 40 (IAS 40), ASC 820, ASC 840, ASC 852, ASC 350, and ASC 360. Further, they have several reporting obligations concerning the allocation of value of assets within a business combination, including ASC 805 (or IAS 40), IRC 1060, and IRS MACRS Depreciation Schedules.
Each type of reporting obligations has its own set of requirements, definitions, and classifications.
A business combination is the various assets combined to create a business, which include intangibles (contracts, patents, etc.), good will, real property (fee and leased estates, etc.), personal property (machinery, vehicles, etc.), assets and liabilities, equity and debt, and the numerous IRS modified accelerated cost recovery system depreciation schedules (MACRS).
As “qualified appraisers” according to the IRS, Federal Appraisal provides reports to investors and taxpayers with the requisite appraisal documents and advisory support to meet all accounting, SEC, and IRS reporting obligations. Our allocation appraisals ensure compliance and add value by lowering reporting costs and taxes, providing our client with a sole-source for multi-discipline, high quality appraisals, consistent across multiple purposes and uses.
See the article written by FAC managing partner, Mark Pomykacz, MAI and qualified state-certified general real estate appraiser, on the topic of business combinations in real estate appraisal, “Relationships between the Overall Property and Its Parts, and the Three Approaches to Value ” published by the Appraisal Journal, Winter 2009.
ASC 805 Appraisals / IAS 40
The FASB ASC 805, or International Accounting Standards 40 (IAS 40), relates to the reporting of business combinations when a business is purchased. It requires properly supported claims concerning the value of the parts of a business combination. Basically, the purchase price must be allocated based on their market value, to various numerous assets and liabilities that comprise the business combination. All companies aiming to comply with GAAP requirements, must comply with ASC 805. ASC 805 became effective December 15, 2008. ACS 805 superseded Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 141 and 141R (SFAS 141, SFAS 141R), and APB Opinion No. 16.
IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both). Investment properties are initially measured at cost, and with some exceptions, may be subsequently measured using a cost model for fair value model, with changes in the fair value under the fair value model being recognized in profit or loss.
We can assist with financial reporting requirements, estimating the fair value of a property’s tangible and intangible assets. Our analysis can further assist independent auditors, management specialists, or outside legal counsels, as well as regulatory or tax authorities. We are competent in AUD-603, Using the Work of an Auditor’s Specialist, AU-C Section 230, Audit Documentation, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and AU-C Section 500, Audit Evidence.
Internal Revenue Code Section 1060 Purchase Price Allocation Appraisals
Allocation appraisals, when used for income tax reporting concerning the purchase of a business (a business combination), are sometimes called purchase price allocations. Internal Revenue Code (IRC) Section 1060, Special Allocation Rules For Certain Asset Acquisitions, require the total purchase price of a business combination be allocated among specifically defined classes of assets. The asset classes are:
Class I – cash and general deposit accounts
Class II – actively traded securities
Class III – assets that are marked to market annually
Class IV – inventory and property held for sale.
Class V – assets that do not fall within the other classes
Class VI – IRC Section 197 assets (intangible assets) except goodwill and going concern value
Class VII – goodwill and going concern value
See Purchase Price Allocation for more information.
Internal Revenue Code MACRS Cost Segregation Appraisals Cost segregation appraisals allow taxpayers to save substantial amounts in income taxes, but only if their claims to the Service are properly supported. Federal Appraisal provides that support via our allocation appraisals.
See Cost Segregation for more information.
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Partial and Partnership Interest Appraisals
Partial interest and partnership interest appraisals start with a sound appraisal of the intrinsic value of the underlying fee simple real estate or overall business. To complete the exercise, the appraiser must then employ special appraisal methodologies and adjustments to ascertain the value of the partial interest in the real estate or of the partial or partnership interest in the business entity.
Federal Appraisal provides both the appraisals of the underlying real property and business enterprise and of the partial interest. Our clients are assured that their reporting will withstand accounting, legal audit, and examination, as we have years of experience employing the recognized appropriate and acceptable valuation procedures and reporting methods.
We begin with an analysis of the underlying asset, which is an appraisal within itself. Next, we review the relevant partial or partnership interest documents, with accounting and legal counsel when necessary, in order to discern the impact on the value of the documents. Lastly, we research, analyze, then apply the adjustments needed to pro rata value for lack of control and lack of marketability. These adjustments are known as the discount for lack of control (DLOC) and the discount for lack of marketability (DLOC).
We appraise limited partner and general partner interests, family limited partnerships (FLPs), fractional estates, deed restrictions, conservation easements, and encumbrances.
Since our reports are USPAP compliant and are certified by state certified real estate appraisers with decades of experience in such appraisal issues, we meet the requirements for IRS “qualified appraisers”.
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Estate & Gift Tax Appraisals
Federal Appraisal, LLC provides appraisal services for gifting closely held stocks or interests in partnerships and real estate holdings and for IRS estate issues.
Real Estate Appraisals for Estate & Gift Tax Purposes
All appraisals are written for specific purposes. An appraisal written for one purpose may not be appropriate for use in another purpose. Appraisals ought to be written specifically for estate and gift tax purposes. Federal Appraisal specializes in appraisals for various IRS reporting purposes, such as Estate and Gift Tax purposes.
Business Appraisals for Estate & Gift Tax Purposes
Similar to the circumstances discussed above, business appraisals (appraisals of businesses and business intangibles) written for estate and gift tax purposes are distinct from appraisals for other purposes. Federal Appraisal specializes in such appraisals.
See Business Valuation/Asset Type for more.
Discount Studies
Estate & Gift tax appraisal issues have become complex over the years.
Essentially, proper management requires two distinct appraisals. The first is an appraisal of the underlying real property or business or asset, as if an undivided/fee simple interest. The second is an appraisal of the discount to be applied to the undivided/fee simple interest in order to find the value of a partial interest. These appraisals are commonly called “discount studies.”
An essential part of the estate and gift tax analysis is the determination of the appropriate discount for partial interests. The lack of control and influence on management, and the lack of marketability and illiquidity associated with a partial interest can often dramatically reduce the value, and hence the taxable basis. When discounting for less than a controlling interest, several factors should be considered, including but not limited to:
Leveraged Reverse Freezes
The process of undergoing a Leveraged Reverse Freeze can be highly complex.
In a leveraged reverse freeze, a preferred partnership interest is exchanged for either a note, transfer of preferred partnership interest to a designated grantor retained annuity trust (GRAT), or other types of real estate planning means. The end goal of a leveraged reverse freeze is for the receiving family member or GRAT to receive a portion of the cash flow and appreciation after all interest payments/GRAT annuity payments have been accounted for.
We at Federal Appraisal offer services to help those who interested, or may be interested, in partaking in a Leveraged Reverse Freeze.
Lack of Control and Management
size of interest and dispersion of voting interests
limits to distributions
restrictions on transfer of interest
key person, general or limited partnership interest
Lack of Marketability and Illiquidity
restrictions on sale
rights to partition
blockage factors
investor appetite for type of investment
cost of delay and reduced cash flow
indefinite or finite investment/partnership
Form 8283
Federal Appraisal, LLC has experience with and can certify (sign) Form 8283, Non-cash Charitable Contributions as well.
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