Integrating a recent acquisition or investment in the financial statements? The financial reporting standards require to allocate the purchase price to the acquired assets and liabilities. These assets and liabilities can consist of items already recognised on the balance sheet. However, the acquisition can also lead to the emergence of new balance sheet items such as brand names, customer relations, permits or intellectual property. The outcome of the PPA will result in the allocation of purchase price as presented schematically hereunder.
Components of the purchase price allocation
A purchase price allocation consists of the following steps:
- Determination of the acquiring party;
- Identification of the business combination;
- Determination of the acquisition date;
- Alignment between the accounting standards;
- Determination of the cash generating units (CGUs);
- Performing a business enterprise value test;
- Identification of the assets and liabilities acquired;
- Valuation of the assets and liabilities;
- Calculation of the deferred taxes;
- Determination of the goodwill; and
- Execution of a validity test.
Identification of the assets and liabilities
Following the guidelines of the International Financial Reporting Standards (IFRS) or the Dutch “Richtlijnen voor de Jaarverslaggeving” (RJ), the acquired assets and liabilities will be identified. This can lead to the emergence of new balance sheet items, such as presented adjacently.
Valuation of assets and liabilities
To determine the fair value of the assets and liabilities, the guidelines of the International Valuation Standards will be applied. In this regard, a distinction will be made between an income-, market- or cost approach. The approach applied is dependent on the type of asset or liability.
Knowledge of the recognised valuation methods, as well as the reporting guidelines (RJ and IFRS) are essential for executing a PPA. Also, it is important to discuss the identification of assets and liabilities, the number of CGUs and the valuation methods with your auditor. This prevents discussions afterwards.
ACTIVITIES 2021 AND 2022
Regarding an intended sale of shares, Supreme guided the entire acquisition on behalf of the sellers.
Purchase price allocation
After acquiring the company, the acquisition needed to be incorporated into the financial statements. Supreme drafted the purchase price allocation.
Due to a dispute between two shareholders regarding the price of the shares to be transferred, the interim board member asked for a valuation. Supreme drafted an independent valuation.