Purchase Price Allocation
Professional support in accounting for acquisition transactions - Purchase Price Allocation
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 of the acquired company, including tangible and intangible assets.
The difference, which arises between the purchase price paid by the acquirer and the fair values of the acquired entity's identified assets and liabilities, is recognized as goodwill. If the fair values of the assets and liabilities of the acquired entity exceed the transaction price, the difference under IFRS 3 / IFRS 3 is treated as a bargain purchase gain and recognized directly in the statement of comprehensive income.
The process of the Acquisition Price Allocation includes:
- determination of the acquirer and the target,
- setting the date of control gaining,
- determination of the acquisition 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 PPA process should be carried out at the level of individual cash generating units (CGUs), in accordance with the guidelines of IFRS 3 and International Accounting Standard 36 - Impairment of Assets (IAS 36).
After determining the cash-generating units for the acquired entity, for each of the identified CGUs, the following processes should be carried out:
- identification - identifying assets and liabilities not disclosed on the balance sheet of the target 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 test to verify 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 on 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 on the balance sheet,
- allocation - allocation of the total acquisition 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 goodwill.
The fair value of individual assets and liabilities should be estimated separately based on appropriate approaches and methods - market (comparative), income and cost (asset).
The Purchase Price Allocation process can be carried out in the context of:
- the acquirer's consolidated financial statements - the acquirer acquires a controlling interest of shares in a company; the fair values of assets, liabilities and goodwill are recognized on the acquirer's consolidated balance sheet,
- the separate financial statements of the acquirer - the acquirer acquires an enterprise or an organized part of an enterprise; the fair values of assets, liabilities and goodwill are recognized on the separate 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 acquisition and is recognized in the statement of comprehensive income.
In the case of accounting for the Purchase Price Allocation in accordance with the Polish Accounting Act, any excess 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 is recognized on the side of equity and liabilities of the balance sheet of the acquirer.
