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

Full Explanation

A purchase price allocation under IFRS 3 or ASC 805 follows a structured process. Step 1: Determine the total consideration transferred (cash, equity, contingent consideration at fair value). Step 2: Identify all tangible assets acquired and liabilities assumed at fair value — inventory, PP&E, receivables, payables, debt. Step 3: Identify intangible assets not previously recognised on the target's balance sheet. This is often the most complex step and requires understanding the business to find assets like customer relationships, brand value, technology, favourable contracts, and order backlog. Step 4: Select and apply appropriate valuation methods for each intangible asset — Relief from Royalty for brands, MPEEM for customer relationships, Cost Approach for assembled workforce, and so on. Step 5: Calculate the Tax Amortisation Benefit (TAB) for each asset where applicable. Step 6: Allocate any remaining purchase price to goodwill. Step 7: Perform sensitivity analysis and document all assumptions. The acquirer has a 12-month measurement period from the acquisition date to finalise the PPA. During this period, provisional amounts can be adjusted as new information about facts and circumstances existing at the acquisition date is obtained. Getting PPA right is critical because the resulting asset values drive amortisation expense and impairment testing for years.

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