The deal is signed and the champagne is gone. Then your auditor asks for the purchase price allocation. Here is what that means and how to prepare.
What a PPA is
Under IFRS 3 and ASC 805, a buyer must record the acquired business at fair value. The price paid is split across:
- tangible assets and liabilities, adjusted to fair value,
- identifiable intangible assets, such as customer relationships, brands, technology, licences and order backlogs,
- and goodwill, which is whatever is left.
Why it matters
The split changes your future profits. Intangible assets with a finite life are amortised, which reduces earnings each year. Goodwill is not amortised under IFRS, but it must be tested for impairment every year. Auditors therefore review a PPA closely.
Timing
You have a measurement period of up to 12 months from the acquisition date to finalise the allocation. In practice, most auditors want a near-final PPA for the first year-end after the deal.
Common intangibles and how they are valued
- Customer relationships: multi-period excess earnings method.
- Brands and trademarks: relief-from-royalty method.
- Technology: relief-from-royalty or replacement cost.
- Non-compete agreements: with-and-without method.
How to make it smooth
Start the PPA when the deal closes, not at year-end. Share the deal model, due diligence reports and management forecasts early. Agree the list of intangibles with your auditor before the detailed work starts.
Our team has delivered PPAs for transactions in hospitality, consumer goods and technology across the GCC and the US. See our valuation services or book a free consultation.