Purchase Price Allocation (PPA) is a process involving the identification and estimation of the fair value of acquired assets - tangible and intangible - and their final disclosure on the acquirer's balance sheet.
The Purchase Price Allocation process is carried out on the basis of International Financial Reporting Standard 3 - Business Combinations (IFRS 3), according to which a company acquiring control of another entity should disclose in its financial statements the assets and liabilities of the acquired company, including tangible and intangible assets. The difference arising between the fair values of the acquired entity's identified assets and liabilities and the purchase price paid by the acquirer is recognized as goodwill.
The process of the Purchase Price Allocation includes:
- determination of the acquirer and the acquired entity,
- determination of the date of control acquisition,
- determination of the purchase price, including the portion for payments contingent on uncertain future events,
- determination of Cash Generating Units (CGUs),
- estimation of fair values of individual assets and liabilities,
- allocation of the purchase price to the acquired assets and liabilities, and final calculation of goodwill.
The Purchase Price Allocation process should be carried out at the level of respective Cash Generating Units (CGUs), in accordance with the guidelines of IFRS 3 and International Accounting Standard 36 - Impairment of Assets (IAS 36).
Once the Cash Generating Units for the acquired entity have been identified, processes should be carried out for each of the identified CGUs:
- identification - identifying assets and liabilities not reported on the balance sheet of the acquired company until the date of acquisition; in particular, intangible assets may be disclosed at this stage,
- recognition - subjecting the identified assets and liabilities to a verifying test to confirm that they meet the various criteria for recognition on the balance sheet,
- valuation - revaluation to fair value (fair value) of assets and liabilities - both those that were already disclosed in the balance sheet of the acquired entity as of the transaction date, as well as those currently identified in the Purchase Price Allocation process and meeting the criteria for recognition in the balance sheet,
- allocation - allocation of the total purchase cost to the algebraic sum of the net value of assets and liabilities attributable to the acquirer; the potential excess of the acquisition price over the acquirer's share of the total value of assets less liabilities is defined as goodwill.
The fair value of individual assets and liabilities should be estimated separately based on appropriate valuation approaches and methods – including market, income and cost approaches.
The Purchase Price Allocation process can be carried out in the context of:
- the acquirer's consolidated financial statements - the acquirer acquires a controlling shareholding; the fair values of assets and liabilities of the acquired entity, and goodwill are recognized in the acquirer's consolidated balance sheet,
- standalone financial statements of the acquirer - the acquirer purchases an enterprise or an organized part of an enterprise; the fair values of assets and liabilities of the purchased enterprise and goodwill are recognized in the standalone balance sheet of the acquirer.
In a situation where IFRS 3 is applied, the excess, if any, of the acquirer's share of the total value of assets less liabilities over the purchase price is a gain on a bargain purchase and is recognized in the statement of comprehensive income (former profit and loss statement).
In the case of accounting for the Purchase Price Allocation in accordance with the Polish Accounting Act, the surplus, if any, attributable to the acquirer, of the portion of the sum of the value of assets less liabilities, over the purchase price, is defined as negative goodwill and recognized as part of the liabilities of the balance sheet of the acquired entity.