While the technical accounting standards under FASB ASC 805 Business Combinations are well established, the practical steps needed to execute a smooth and audit-ready valuation often receive less attention. The AICPA’s Business Combinations Accounting and Valuation Guide offers helpful guidance, but any organization conducting a valuation benefits from a process that is not only technically sound, but also clear, well-documented, and audit-ready.

To successfully navigate ASC 805 valuations, below are three key strategies that promote clarity, compliance, and efficiency:

1. Define the Scope Early—Without Overlooking Critical Elements

Although ASC 805 allows for a measurement period of up to one year, many companies, particularly public ones, strive to finalize valuations within the same quarter as the transaction. While some data may only become available post-close, a thorough due diligence process typically provides enough early insight to guide the valuation. Pre-deal analyses can also inform both the transaction structure and subsequent audit processes.

An early and thorough scoping effort helps ensure that no material asset or liability is omitted:

  • Consideration Transferred: While cash deals are relatively straightforward, equity components such as stock considerations, rollover equity, or step acquisitions can introduce complexity. Contingent considerations (e.g., earnouts) often require robust modeling, such as Monte Carlo simulations, to withstand auditor scrutiny.
  • Intangible Assets: Identify and evaluate all possible intangibles during the scoping phase. Methodologies should be selected upfront to avoid delays. For private companies, determine early whether the Private Company Council (PCC) alternative will be applied.
  • Tangible Assets: Evaluate whether book values approximate fair values. Assess materiality thresholds and be mindful of various types of obsolescence, including economic obsolescence. Material off-market leases must also be considered.

Involving auditors during the scoping phase can significantly reduce downstream friction. A transparent, well-documented rationale for recognizing (or excluding) specific assets and liabilities supports smoother audit reviews and demonstrates alignment with accounting standards.

2. Build Robust Valuation Models Supported by Comprehensive Data Gathering

A successful valuation depends on more than completing a checklist. Auditors and clients alike benefit from an analytical approach that goes beyond surface-level requests and fosters a deeper understanding of the target entity.

  • Prospective Financial Information (PFI): Obtain detailed, multi-year financial projections that exclude buyer-specific synergies. Ensure underlying assumptions are well-supported. Auditors will perform rigorous procedures to evaluate the reasonableness of PFI, particularly in light of PCAOB expectations.
  • Asset Valuation Models: Design flexible, dynamic models that can accommodate changes in assumptions and inputs based on client feedback or auditor inquiries. Clarity in structure and documentation is essential for explaining the models’ outputs.
  • Quality Control: Implement systematic math and logic checks throughout the analysis. All inputs should be verified before inclusion in reports shared with auditors or clients.
  • Clear Documentation: Valuation reports should communicate key assumptions, methodologies, and conclusions in a format that is easy for both clients and auditors to follow.

Strong data quality and transparent modeling processes reduce the likelihood of repeated audit requests and support a defensible, efficient valuation.

3. Maintain Ongoing Engagement by Facilitating Communication Between All Stakeholders

Valuation is an iterative process. Collaboration between valuation professionals, clients, and auditors is key to ensuring that conclusions are well-supported and that no material considerations are missed.

Valuation professionals should help clients consider questions such as:

  • “Have all material assets and liabilities been addressed?”
  • “Are the assumptions used consistent with those a market participant would apply?”
  • “Does the valuation align with the strategic rationale for the acquisition?”

Proactive communication with auditors, including their internal valuation specialists, is equally important. Given heightened PCAOB scrutiny around business combination valuations, preparing detailed explanations of key assumptions, methodologies, and judgments can prevent last-minute complications.

The best valuation results come from thoughtful planning, rigorous execution, and proactive collaboration. A well-scoped and transparently documented valuation not only satisfies technical requirements, but it facilitates trust, reduces audit delays, and drives value for all parties involved.