What is purchase price allocation?
Purchase price allocation refers to the structured allocation of the acquisition price of a the acquired party to its identifiable assets and liabilities. This process is a fundamental component of transparent and compliant financial reporting following a business combination. Supreme Valuation and M&A B.V. provides pragmatic and cost-effective support in performing a purchase price allocation, with a clear focus on the accurate, consistent and efficient audit procedure.
A properly executed purchase price allocation supports reliable financial statements and ensures that the economic substance of the transaction is reflected without unnecessary complexity.
The outcome of a PPA leads to a structured breakdown of the purchase price, as illustrated above.
What does a Purchase Price Allocation (PPA) involve
Purchase price allocation is the process by which the total consideration paid in an acquisition is allocated to the identifiable assets and liabilities , recognised at fair value. This allocation is required under IFRS 3 and other applicable accounting standards such as Dutch GAAP. The excess of the purchase price over the fair value of the net identifiable assets and liabilities is recognised as goodwill.
Through purchase price allocation, insight is obtained into the composition of the transaction and the resulting balance sheet impact, which is relevant for stakeholders and users of the financial statements.
When is purchase price allocation required?
Purchase price allocation is mandatory in the case of a business combination, including mergers and acquisitions. Within the prescribed reporting period following the acquisition date, the purchase price must be allocated to the identifiable assets and liabilities at fair value.
Beyond compliance requirements, purchase price allocation contributes to consistency in financial reporting and provides clarity regarding the post-acquisition financial position of the acquirer.
Valuation methods applied in purchase price allocation
Supreme applies the International Valuation Standards when performing purchase price allocation engagements. Depending on the characteristics of the asset, liability or business, one or more valuation approaches may be applied.
Market Approach
The market approach determines value by reference to comparable assets or transactions for which observable market data is available. This approach reflects the principle that a rational buyer will not pay more than the price of a comparable asset with similar economic characteristics.
Typical applications within purchase price allocation include:
- Minority interests valued using trading or transaction multiples
- Trademarks and other intellectual property valued using the relief-from-royalty method
Income Approach
The income approach is based on discounting expected future cash flows to their present value. It reflects the economic benefits that an asset or business is expected to generate over its useful life.
Within purchase price allocation, this approach is commonly applied to:
- Discounted cash flow model for valuing majority interests or allocation of the purchase price to the cash generating units;
- Relief-from-Royalty method for IP, brands, or software;
- Multi-Period Excess Earnings Method for customer contracts, order backlog or client relationships;
- With-and-Without Method for non-compete clauses.
This approach can be used for the valuation of assets which generate cash flows.
Cost Approach
The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset or company than the cost to obtain an asset of equal utility. The value is estimated based on the replacement, summation or reproduction cost of an asset, adjusted for obsolescence. It is applied where no active market exists and the asset does not generate independent cash flows.
Typical applications include:
- Internally developed software
- Assembled workforce
Key components in a PPA analysis
A purchase price allocation involves more than deriving goodwill by offsetting the book value of the shareholders equity against the purchase price. It is a structured process consisting of the following key steps:
- Identification of the acquirer
- Elaboration of the business combination
- Determination of the acquisition date
- Defining the cash-generating units (CGUs)
- Performing a business enterprise value test
- Identification of assets and liabilities
- Valuation of assets and liabilities
- Calculation of deferred tax liabilities
- Calculation goodwill
- Determine useful life and amortisation period of acquired assets
- Perform the test
A disciplined execution of these steps enhances a consistent recognition of the acquisition. Moreover, it facilitates a smooth audit process.
Critical considerations when performing purchase price allocation
Identification of intangible assets
Intangible assets often represent a significant portion of the acquisition consideration. Within the purchase price allocation, identifying and valuing such assets requires specialised expertise and a structured approach. Supreme has extensive experience in this area.
Tax implications
The revaluation of assets and liabilities may result in deferred tax positions. These implications are carefully considered in the purchase price allocation to ensure accurate and compliant financial reporting. Next to that, the depreciation period of these positions will be determined.
Compliance with accounting standards
Whether reporting under IFRS, Dutch GAAP or other applicable standards, Supreme ensures that the purchase price allocation is performed in accordance with relevant accounting principles and professional guidelines.
Why choose Supreme for your Purchase Price Allocation?
Focus
Supreme exclusively provides two types of services. This allows for the presence of dedicated and deep knowledge, leading to high-quality services.
Result
Supreme is proactive and works closely with its customers to reach milestones and to meet the highest standards of quality.
Responsibility
Trade with honesty, integrity and thoughtfulness. Supreme delivers on its promises to all those involved.
Trust
Supreme is independent and conforms to professional guidelines. Nothing is more important than trusted relationships with all stakeholders.
Practical examples of Purchase Price Allocation (PPA)
Below are several examples where Supreme successfully conducted a purchase price allocation. Each PPA report was tailored to the specific business combination, ensuring full compliance, clear documentation, and audit-ready results.
Purchase Price Allocation
For a company active in the secondment of technical and construction professionals, a PPA was prepared following the acquisition.
Purchase Price Allocation
For a Dutch company supporting industrial clients in improving and optimising production processes, a PPA was performed following an acquisition by a private equity party.
Purchase Price Allocation
For a company in the transport & logistics sector, a PPA was performed following an acquisition by a private equity party.
Get in contact
Looking for an experienced specialist to support your purchase price allocation from start to finish? Supreme assists throughout the entire process, from valuation and documentation to the preparation of an audit-ready PPA report, including goodwill and deferred tax considerations. We also ensure coordination with your auditor. Please contact us for further information.
Frequently asked questions about Purchase Price Allocation
What is purchase price allocation?
What is the difference between PPA and goodwill?
Who is responsible for purchase price allocation?
How is a PPA performed?
When must a PPA be completed?
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