I have bought a business – what must I do next?

What is a Purchase Price Allocation (PPA) and when do I need one?

If you are in the process of acquiring a business or have recently acquired a business, you’ll need to know the role of a Purchase Price Allocation (PPA).

It is likely that the purchase of a business includes an element of Goodwill (i.e. the purchase price is greater than the net assets you acquired). In these circumstances, you are required by the International Financial Reporting Standards (IFRS) to assess the fair value of assets acquired and liabilities assumed. This process is referred to as a Purchase Price Allocation (PPA).

In this article, we take a closer look at what a PPA is, who needs to perform one and when it needs to be performed.

What is a Purchase Price Allocation (PPA)?

Purchase Price Allocations are required by International Financial Reporting Standards (IFRS) for all acquisitions in accordance with IFRS 3 Business Combinations. A PPA requires that the Acquirer fair value the assets acquired, and liabilities assumed in their financial statements and allocates the purchase price to these assets and liabilities.

PPAs are performed to align the completed transaction with the applicable accounting principles of the Acquirer and to those of the acquired Target.

When does a PPA need to be performed?

A Purchase Price Allocation will be required to be performed by the Acquirer upon the conclusion of an acquisition of a controlling stake in a Target company. IFRS 10 defines that in order for an investor to have control over an investee, the investor must have all three of the following:

  • Power over the investee; 
  • Exposure or rights to variable returns from its involvement with the investee; and 
  • The ability to use its power over the investee to affect the amount of the investor’s returns.

It is important to note that the PPA assessment is required to be performed by an independent expert and cannot be performed by the appointed auditor of the Acquirer.

Key issues that make a PPA complex

Key issues that may arise when performing a Purchase Price Allocation assessment would relate to:

  1.  Determining the fair value of purchase consideration:
    • Determining the purchase consideration if it involves a contingent element like earn-outs that are payable in the future
    • Part of the purchase price being discharged by the issuance of equity shares of a private company; &
    • Treatment of dilutive instruments if they are a part of the purchase consideration.
  2. Allocation of fair value of total purchase consideration to all tangible and intangible assets and liabilities. While identification of tangible assets is often straightforward, identifying intangible assets for allocating value can be challenging due to the following diverse groups of intangible assets:
    • Marketing-related intangibles
    • Customer-related intangibles
    • Technology-related assets intangibles
    • Human intellectual capital-related intangibles

What does a PPA valuation entail

Determining the purchase price and date of acquisition relevant for the PPA would be the first step. We at Alpha would determine the transaction price, by analysing the transaction in detail and taking into account the relevant provisions.

The Components which typically comprise a Purchase Price Allocation report primarily consist of the following:

Net identifiable assets

Net identifiable assets refer to the book value of assets acquired and liabilities assumed by the Company, in accordance with IFRS 3 Business Combinations which includes both tangible and intangible assets

Fair value adjustments

Adjustments to the book value of an asset or liability are required to be made in accordance with IFRS 13, or an applicable underlying standard that supersedes IFRS 13, if the asset’s carrying value differs from its fair market value. The fair value adjustment amount is determined based on the assessment of the fair market value of the assets acquired and/or liabilities assumed

Goodwill

This is the amount paid in excess of the total fair market value of assets and liabilities of an acquired company which then needs to be distributed across the cash-flowgenerating units (CGUs) of the group. If a negative difference is determined, the bargain purchase should be recorded against earnings to increase profits. From an acquirer’s perspective, goodwill is critical in its accounting reporting because IFRS requires a company to re-evaluate all recorded goodwill at least once a year and record impairment adjustments if necessary.

Acquisition costs

Acquisition costs are not considered in a purchase price allocation valuation report as these costs are to be expensed by an acquirer whenever they have been charged as long as the corresponding services have been provided.

 

 

 

 

 

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