The Legend of WARA and Benchmarking Purchase Price Allocation Data
Date of Award
Doctor of Business Administration (DBA)
Jack Welch College of Business
Dr. Lucjan Orlowski
Dr. Linda Hughen
Dr. Carlos F. Liard-Muriente
This paper examines the relationship of the relative weightings of intangible assets recorded in purchase price allocations by industry based upon a weighted average rate of return (“WARA”) framework to determine if there is a statistical relationship between the value weightings and discount rates and if benchmarking the value weightings to industry data can be used as a reliable indicator of reasonableness. Both the WARA process and benchmarking assume that the relative values of intangibles impact the discount rate selected or that there is commonality in the industry ratios. Intuitively, the use of WARA and Benchmarking for financial reporting both make sense. Yet, based upon private company data examined, the relative value weightings of intangible assets generally do not have a relationship with the implied discount rate from private company transaction data and benchmarking does not support the values. Although these findings note the current WARA process is flawed, it is established practice for financial reporting. Yet, the development of WARA can be improved by using market data and assessing the variation to support a selection of discount rates in conformity with accounting guidance. Consequently, this paper outlines the problem with the WARA methodology, as well as a policy recommendation to improve the process.
G12, G32, G34, M41, M42
Crane, M. (2018). The legend of WARA and Benchmarking purchase price allocation data. Jack Welch College of Business dissertation, Sacred Heart University, Fairfield CT.
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