Purchase Price Allocation (PPA)

GLOBAL STRATEGIES, INSIGHT-DRIVEN TRANSFORMATION

An acquisition of or a merger with a business or a business combination requires a purchase price allocation (PPA) to be performed under IFRS 3 and FRS 102 Section 19 (FRS 102:19).

What is a Business Combination?

A business combination is a transaction in which an acquirer obtains control of one or more businesses. IFRS 3 and IFRS 102 further lay down specificities based on which a transaction can be termed as a business combination.

Mechanics of a PPA

The following steps are involved in a PPA exercise:

Identifying the ‘acquirer’
Determining the ‘acquisition date’
Determining the ‘purchase consideration’
Recognising and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest (NCI or minority interest) in the acquiree.
Determining the value of the consideration, especially if a contingent consideration or payment in the form of the acquirer’s stock is involved, which may need to be fair valued separately.
Recognising and measuring goodwill (excess of purchase consideration over the fair value of the acquired net assets) or a gain from a bargain purchase (excess of the fair value of the acquired net assets over the purchase consideration).

Contingent Consideration

Contingent consideration or earn-out payments form a part of the purchase consideration and can become payable in cash or stock in the future if certain agreed-upon financial and/ or operational goals are met. Fair value assessment of contingent consideration may require complex valuation models such as the probability-weighted expected return method and option pricing models (e.g., Monte Carlo simulations, binomial models, or Black-Scholes).

IFRS 3 requires the fair value of contingent consideration to be included in the purchase consideration regardless of whether payment is probable. In contrast, FRS 102:19 requires the fair value of contingent consideration to be included in the purchase consideration only if payment is probable and the amount can be measured reliably. If the contingent consideration is not recognised as of the acquisition date but a further outflow subsequently becomes probable, goodwill is adjusted to reflect this additional amount.

How Can We Help?

Our team of experienced valuation experts partners with you to deliver a robust valuation opinion reflecting the value of each business component, asset, liability, components of purchase consideration (like contingent consideration), and the resultant goodwill estimate.
Leveraging the industry’s best practices and latest guidance, our team provides you with sophisticated and supportable valuations that withstand audit scrutiny.