Two of the largest acquisitions last year involved intangible assets valued at well over 50% of the total purchase price.  Procter & Gamble's .5 billion acquisition of Gillette allocated .5 billion, or 59%, of the total purchase price to intangible assets. And .2 billion, or 53%, of SBC's .5 billion purchase price of AT&T was allocated to intangible assets.

Recent financial reporting requirements in the US, UK, Europe and Canada require companies to appraise the Fair Value of assets and liabilities for presentation in their financial statements. The US Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) now require Purchase Price Allocations for all acquisitions. The Purchase Price Allocation process allocates the cost of an acquired entity to the Fair Value of assets acquired and liabilities assumed and it establishes useful lives for identified assets. In addition, the rules require companies to assess the fair value of recorded goodwill and identifiable intangible assets on at least an annual basis and sometimes more often.

The purposes of these requirements are for greater transparency to investors. But the rules also allow greater subjectivity in the allocation of assets as amortizable or non-amortizable and greater accountability for the acquirer. Subjectivity is involved with estimating the future value potential of brands, technology, customer relationships, goodwill, and how the acquirer recognizes and measures its acquired intangible assets will impact its future earnings. Intangible assets' amortized charges will impact the acquirer's future earnings by reducing the book value of acquired intangible assets on the balance sheet, thereby reducing the risk of future impairments. Value allocated to goodwill (or longer-lived intangible assets) may not reduce book value but can have an increased risk of future impairment. These factors must be considered in creating valuation models for the acquired assets in the Purchase Price Allocation.