What are the common mistakes in purchase price allocation?

Full Explanation

Purchase price allocation is technically complex and mistakes can have lasting consequences on financial reporting. The most common errors include: failing to identify all intangible assets (missing trade names, non-compete agreements, favourable leases, or order backlog, causing their value to be incorrectly allocated to goodwill); using a single discount rate for all intangible assets (different asset classes have different risk profiles and require different rates); neglecting the WARA reconciliation (the weighted average return on assets should reconcile to WACC — if it does not, the asset values or rates are inconsistent); omitting the tax amortisation benefit (the TAB can add 10-20% to intangible values and its omission understates fair value); using overly optimistic revenue projections (inflating intangible values and compressing goodwill); applying incorrect customer attrition rates (too low inflates customer relationship values; too high understates them); failing to consider the measurement period (provisional amounts can be adjusted within 12 months — this flexibility is often underused); and not performing sensitivity analysis (without testing key assumptions, the valuation lacks robustness). These mistakes can trigger auditor qualifications, restatements, or regulatory challenges. Companies can mitigate these risks by engaging experienced valuation professionals, providing comprehensive data, and allowing sufficient time for the PPA process.

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