Purchase Price Allocation

WHEN

The method of allocating a fair value to all the assets procured and liabilities presumed of a target company is known as purchase price allocation (PPA). A company needs to undertake this exercise when either a listed or private company, which prepares financial statements under International Financial Reporting Standards, acquires or merges with a company in the M&A process and has paid the purchase price or consideration in the acquisition.

In other words, a price purchase allocation should be typically carried out either when there is an acquisition of the business or a change of control of the management of the company Usually, this method leads to some unassigned residual value consisting of goodwill In such a situation, the purchase price paid to the target company needs to the allocated to all the assets of the seller company. In other words, all the assets and liabilities have to be valued on a fair value basis.

STEPS

There here are four basic steps in a purchase price allocation that the company have to follow if they need to analyze the transaction from the financial and tax purposes, these are given below:

• Price Consideration : First, Company needs to the total consideration paid for the acquiziation of the target company. This includes all kinds of cash and non cash consideration paid or transferred by the Company. In the analysis, the Company also have to properly estimate the libailities paid or assumed in the M&A transaction and these must be properly estimated and included in the calculation of the Price Consideration for the M&A Transaction.

• Valuation of Tangible Assets The second step is to find all types of tangible assets like land building, fixed assets, machinery, etc acquired in the M&A process. Then, these assets are valued using various methods like cost, market, and income approaches. This has to be inline with various accounting,valuation and reporting guidelines under various rules and regulations.

• Valuation of Intangible Assets : The third step is to identify all the intangible assets like patents, IPs, licenses, contracts, , copyright, formula, process, design, pattern, knowhow etc and then value these assets as per the prevailing valuation and accounting guidelines. In this process, all assets are analyzed and valued at the fair value using cost, market, and income approaches.

• Calculation of Goodwill : The fourth step is to find the find the goodwill, which is price consideration minus the fair value of the tangible and intangible assets.

INTANGIBLES

Intangibles are one the most critical components of the PPA allocation exercise. In many cases, intangible asset valuation is valued via multiple complex methods and process. In the valuation of intangibles, there are many key factors that impact the valuation including visibility, exclusivity, and protection rights of these assets.

As per various financial reporting standards and guidelines, intangibles assets is measured and valued as a separate assets over and above the goodwill in the purchaser price allocation which is excess price paid over the fair value of all tangibles and intangibles assets. This make the entire PPA process very complex and time consuming.

In addition to identification of intangibles, global accounting and reporting standards also mandate the regular testing of intangibles and goodwill for the impairment. This has to tested regularly and any fall in the value has to be written off and recorded as the guidelines and standards.

RISK

If a buyer prepare financial statements as per GAAP or IFRS and acquires a company, then as per the reporting requirements, the buyer is obligated to carry out a purchase price allocation except in instances when the acquisition is too insignificant and hence, it will be considered unimportant.

The acquirer’s auditor then carries out a thorough analysis of the valuations of the assets and liabilities. In such a case, you need to offer answers to all the questions from the auditor, which could be a few questions or multiple pages of questions. Therefore, you need to collaborate with an independent valuation expert because greater the valuation quality and richer the experience, lesser will you spend time and money on the evaluation process.

Besides, if the valuation of the acquired intangible assets is of unsatisfactory quality or objectionable to the auditor, you may have to a carry out the valuation from scratch at additional expenses. Therefore, team up with Valueteam for excellent valuation solutions and for saving your time and money and avoiding potential business problems.