A business combination is defined by the IASB as a “transaction or other event in which an acquirer obtains control of one or more businesses”, resulting in the need for a Purchase Price Allocation (“PPA”). This article focuses on PPAs for financial reporting purposes.
Objective of a PPA
The objective of a PPA is to determine the fair values of the identifiable assets and liabilities of the target company.
Broadly speaking, the acquiring entity has had to determine the fair values of the identifiable assets and liabilities of the target. The acquirer shall make those classifications based on the contractual terms, economic conditions and its operating or accounting policies as at the acquisition date.
IFRS 13 defines ‘fair value’ as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. It is explicitly an exit price.
Steps in PPA:
- Determine the fair value of consideration transferred;
- Measure all existing assets and liabilities of the target company to fair values;
- Identify if there are any intangible assets;
- Determine the fair value of acquired identifiable intangible assets; and
- Allocate the remaining consideration to goodwill
Depending on what items are included within this allocation process and what values are placed on them, this will result in a difference to the consideration given that has to be accounted for. Where the amounts allocated to the assets and liabilities are less than the overall consideration given, the difference is accounted for as goodwill. Goodwill is an asset that is not amortised, but subjected to some form of impairment test.
Identification & Measurement of the key assets:
- Measuring material tangible assets (e.g. building, land, machinery & equipment, inventory, investment property, biological asset)
- Recognizing and measuring identifiable intangible assets (e.g. patent, trademark, customer relationship)
- Measuring material non-current liabilities (e.g. long-term loan, convertible bonds)
- Measuring material investment in subsidiaries/associates
An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable. IAS 38 – Intangible Assets lists such identifiable intangible assets to include trade names, technology, contract rights, customer relationships, non-competition agreements and customer backlog, among others.
This article is intended for general reference only and has no authority. We do not accept any responsibility or liability in respect of the article and any consequences that may arise from any person acting or refraining from action as a result of any materials in the article. You are advised to consult your experts on relevant fair value requirements and applications.