What is the WARA reconciliation and why does it matter?

Full Explanation

The WARA reconciliation is a critical reasonableness check in purchase price allocation. It works by weighting the discount rate applied to each asset class by that asset's proportion of total enterprise value. For example, if working capital (5% of value, 3% rate), tangible assets (15% of value, 8% rate), customer relationships (30% of value, 14% rate), technology (20% of value, 16% rate), and goodwill (30% of value, implied rate) make up the acquired business, the weighted average of all rates should approximate the WACC. If the WARA materially deviates from the WACC, it signals that either the asset values or the discount rates are inconsistent. Common issues include: applying discount rates that are too similar across asset classes (failing to differentiate risk), using rates that produce a WARA well above WACC (suggesting intangible values are understated), or producing a WARA below WACC (suggesting intangible values are overstated). Auditors specifically check the WARA reconciliation during their review of purchase price allocations. A well-constructed WARA table — showing each asset class, its fair value, its weight, its discount rate, and the weighted contribution — demonstrates analytical rigour and supports the credibility of the entire valuation exercise. The WARA reconciliation is not optional; it is considered best practice under IVSC and AICPA guidance.

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