The Purchase Price Allocation (“PPA”) process requires the allocation of the consideration to the acquired assets and liabilities based on their fair values. Consideration represents the total purchase price an acquirer pays to gain control of a company. Accurately understanding and accounting for consideration is essential for ensuring compliance with regulatory standards and achieving transparency.
Consideration in Terms of International Financial Reporting Standard 3 (“IFRS 3”):
According to IFRS 3, consideration must be measured at its fair value on the acquisition date. This includes the sum of:
- Assets transferred by the acquirer.
- Liabilities incurred by the acquirer to former owners of the target company.
- Equity interests issued by the acquirer.
The consideration transferred can take several forms, each of which must be carefully evaluated and measured:
- Cash consideration: This refers to direct payments of cash made by the acquirer to the target company or its shareholders.
- Equity issuance: When the acquirer issues shares to the target company or its shareholders, the acquisition-date fair value of these shares is included in the consideration. Accurate valuation of these equity issues is crucial to ensure the reported consideration.
- Contingent consideration: This involves payments contingent on future events, such as achieving certain targets. Determining the acquisition-date fair value of contingent consideration often requires advanced valuation techniques, such as probability-weighted scenarios or discounted cash flow models to account for uncertainties.
- Assumed liabilities: These consist of the acquisition-date fair value of liabilities incurred by the acquirer in respect of the business combination.
- Non-cash assets: Non-cash assets, such as property, plant and equity transferred to the former owners of the target company are also included in the consideration at their acquisition-date fair values.
Impact on the Calculation of Goodwill or Gain on Bargain Purchase
The total consideration transferred is a central point in the calculation of goodwill or a gain on bargain purchase. If the total purchase price exceeds the fair value of the acquired net identifiable assets, the excess is recognised as goodwill, reflecting the anticipated future benefits of the business combination.
The Role of Independent Valuation Experts
Valuing the various components of consideration requires attention to detail and adherence to regulatory standards. Given the intricacies and high stakes involved in the PPA process, independent valuation experts bring specialised expertise in:
- Assessing the fair value of complex consideration components.
- Ensuring compliance with IFRS 3 and other applicable reporting standards.
- Leveraging advanced valuation methodologies to address uncertainties and market dynamics.
- Providing objective valuations.
By engaging an independent valuation expert, acquirers can ensure the accuracy and credibility of their financial reporting, enhance stakeholder confidence and mitigate the risk of errors or disputes.
Properly identifying and measuring the components of consideration not only ensures compliance with regulatory frameworks but also strengthens transparency and decision-making. Involving an independent valuation expert in this process adds significant value, offering the technical proficiency and impartial perspective necessary to navigate the complexities of modern business acquisitions.