When one company buys another, the buyer has paid a single price. Its accounts cannot show it as one number. A purchase price allocation (PPA) splits that price across everything acquired: the tangible assets, the liabilities, the intangible assets that were never on the target's balance sheet, and goodwill.
The steps
1. Confirm it is a business combination. IFRS 3 applies when you gain control of a business. Buying a group of assets that is not a business follows different rules, with no goodwill.
2. Fix the acquisition date and the consideration. The date control passes sets the valuation date. Consideration includes cash, shares issued, deferred payments and earn-outs, which are measured at fair value on day one.
3. Fair value the assets and liabilities acquired. Property, plant and equipment, inventory, receivables, debt, leases and provisions are restated from book value to fair value.
4. Identify and value intangible assets. This is the heart of a PPA. Common examples:
- customer relationships and contracts, usually valued with the multi-period excess earnings method
- brands and trade names, using relief-from-royalty
- technology and software, using relief-from-royalty or replacement cost
- licences, order backlog and non-compete agreements
5. Measure non-controlling interests, if you bought less than 100%.
6. Calculate goodwill. Goodwill is what remains after everything else has been valued: the price, plus any non-controlling interest, minus the fair value of the net assets acquired. If the result is negative, a bargain purchase gain is recognised after a careful recheck.
7. Reconcile and document. A well-built PPA ties back to the deal model, checks that the returns on each asset add up to the overall deal return, and explains every assumption for the external auditors.
Timing
IFRS 3 allows a measurement period of up to 12 months from the acquisition date to finalise the numbers. In practice, auditors expect a near-final PPA at the first year-end after the deal.
Who needs one
Any acquirer reporting under IFRS or US GAAP: corporate buyers, private equity portfolio companies, family groups that consolidate, and listed companies. With audited financial statements now needed by more UAE businesses for corporate tax, more mid-sized acquirers are facing their first PPA.
How iConsult can help
Our former Big 4 valuation specialists have delivered PPAs for transactions across hospitality, consumer goods and technology. Read why IFRS 3 requires a PPA, see our valuation services 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.