What are the key steps in performing a purchase price allocation?

Full Explanation

Purchase price allocation (PPA) under IFRS 3 and ASC 805 follows a structured process that must be completed within 12 months of the acquisition date. The key steps are systematic and require collaboration between accountants, valuers, and business management. Step one is determining the total consideration transferred, including cash paid, shares issued, contingent consideration (earnouts), and any pre-existing relationships between buyer and seller. Step two identifies all assets acquired and liabilities assumed, including intangible assets not previously recognised on the target's balance sheet. This is where the most judgement is required — common intangibles include customer relationships, brand names, technology and software, patents, trade secrets, non-compete agreements, favourable contracts, and order backlog. Step three values each identified asset and liability at fair value using the most appropriate method. The Relief from Royalty method is standard for brands and technology. The Multi-Period Excess Earnings Method (MPEEM) is typical for customer relationships. The Cost Approach suits assembled workforce and certain technology assets. The With-and-Without method works for non-compete agreements. Step four allocates the consideration across the valued assets and liabilities. The difference between total consideration and net identified assets and liabilities is recorded as goodwill. If identified net assets exceed the purchase price (a bargain purchase), the gain is recognised in profit or loss. Step five documents everything: valuation reports, key assumptions, management representations, and sensitivity analyses. This documentation is critical because auditors will review the PPA and regulators may scrutinise the assumptions.

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