Why IFRS 3 asks for it
IFRS 3, Business Combinations, uses the acquisition method. The idea is simple: after a deal, the buyer's accounts should show what it actually bought, at what it was worth on the day it bought it. The seller's book values do not do that. They show old costs, and they leave out most of what a buyer pays for, such as customers, brands and technology.
Without a PPA, the whole premium over book value would sit in one goodwill number, telling investors nothing about where the value lies or how long it will last.
What happens to the balance sheet
Intangible assets appear. Customer relationships, brands and technology the target built itself were never on its balance sheet. After the PPA they are, at fair value.
Tangible assets are stepped up or down. Property, equipment and inventory move to fair value. A stepped-up inventory reduces gross margin in the first months after the deal as it is sold.
Goodwill is smaller, but still there. Goodwill is what cannot be separately identified: the assembled workforce, expected synergies, future customers. It usually remains the largest single number.
Deferred tax is created. When the book value of an asset rises but its tax base does not, IAS 12 requires a deferred tax liability. In the UAE that is measured at the 9% corporate tax rate, or the Pillar Two rate for groups in scope. The liability unwinds as the step-ups are depreciated or amortised. It also increases goodwill, because goodwill is the balancing figure.
Contingent consideration becomes a liability. Earn-outs are recorded at fair value on day one and remeasured each year, with the changes going through profit or loss.
What happens to profits after the deal
- Amortisation. Intangibles with a finite life, such as customer relationships and technology, are amortised over their useful lives. This is a real drag on reported earnings for years, which is why many acquirers also report adjusted figures.
- No goodwill amortisation, but annual impairment tests. Under full IFRS, goodwill and indefinite-life brands are not amortised. Instead they are tested for impairment at least every year under IAS 36. An over-optimistic deal can lead to a large write-down later.
- Earn-out swings. If the acquired business beats or misses its targets, the earn-out liability changes, and so does profit.
Why getting it right matters
The choices made in a PPA, such as the useful life of customer relationships or the royalty rate for a brand, shape reported profit for years. Auditors review them closely, and lenders and investors read the result. A defensible PPA keeps future impairment tests manageable and avoids restatements.
How iConsult can help
We prepare PPAs and annual goodwill impairment tests to the standard external auditors expect. Read what a PPA involves, the tax side of a PPA, or book a free consultation.
This article is general information, not legal or tax advice. It reflects the rules as we understand them on the date shown; laws and guidance change, so check the current position or talk to us before you act.