The term lump sum purchase refers to an agreement that involves a single price paid for a bundle, or group, of assets. Since the lump sum purchase can involve several asset classes, it's necessary to allocate the price paid to each asset so the purchase can be accurately reflected on the company's balance sheet.
It's fairly common for a company to purchase a group of assets, and not explicitly identify the price paid for each item as part of the purchase agreement. The classic example would be the purchase of a building. The buyer may have paid one price for the building, land, and equipment inside the structure.
The accountant's challenge is to assign book values to each asset type. This can be accomplished using an appraisal of each item's fair market value and assigning a pro rata share of the purchase price to each. This information can be refined if the seller provides the remaining book value of each asset to the buyer.
Company A has entered into an agreement to purchase a call center from Company XYZ. As part of the agreement, Company A is entitled to the land, office building, as well as the telecommunications equipment. Company A has negotiated a lump sum purchase price of $30,000,000.
In this example, we'll assume the assets are of three types: telecommunications equipment, building, and land. Company A's insurance appraiser indicated the land is valued at $2,000,000, the building at $34,000,000 and the telecommunications equipment at $4,000,000. With this information the following allocation was performed by Company A's accounting department:
|Fair Market Value||% of Total||Allocation of Lump Sum|