Purchase Price Allocation (“PPA”) is the process by which the acquirer of a business allocates the consideration transferred to the fair value of the assets acquired and liabilities assumed.

The circumstances in which PPAs must be performed, as well as the methodology to be applied, are established in the relevant accounting standards: International Financial Reporting Standard (“IFRS”) 3 and Recognition and Measurement Standard (NRV) 19 of the Spanish General Accounting Plan – Business Combinations.

The objective of a PPA is to reflect the economic substance of the transaction by recognising all identifiable assets and liabilities that meet the recognition criteria separately from goodwill.

A PPA must be performed whenever an entity obtains control of a business, regardless of the legal structure of the transaction (e.g., acquisition of shares, merger, or acquisition of assets that collectively constitute a business).

Under the applicable accounting standards, performing a PPA requires: (i) identifying the acquirer; (ii) determining the acquisition date; (iii) measuring the consideration transferred; and (iv) recognising and measuring the identifiable assets acquired and liabilities assumed at fair value.

Any excess of the consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed is recognised as goodwill.

The core of a PPA lies in fair value estimates. Generally, these estimates focus on intangible assets, as accounting standards often mean that such assets are not recognised on the acquired entity’s balance sheet and are only identified as a result of a PPA (e.g., customer relationships).

Additionally, companies with significant tangible assets (machinery, plant, and real estate assets) will require a review of their fair values.

The PPA process typically involves several stages of analysis.

• Firstly, identifying all tangible and intangible assets that meet either the separability criterion or the contractual-legal criterion, including customer relationships, brands, technology, and other non-physical assets that had not previously been recognised on the acquired entity’s balance sheet.
• Secondly, selecting and applying appropriate valuation methodologies, such as the Multi-Period Excess Earnings Method (MPEEM) for customer-related intangible assets or the Relief-from-Royalty Method for brands, ensuring consistency with the assumptions that market participants would use.
• Thirdly, estimating the key valuation parameters, including projected cash flows, discount rates appropriate to each asset’s risk profile, and, where applicable, contributory asset charges.
• Finally, the PPA may require the recognition of deferred tax effects arising from temporary differences between the assigned fair values and the tax bases of the acquired assets and liabilities.

How Can MKD Advisors Help You with Purchase Price Allocation?

At MKD Advisors, we specialise in conducting Purchase Price Allocation exercises. Our team has completed more than 50 PPAs in recent years, including acquisitions carried out by publicly listed companies and investment funds.

Our PPA engagements have been reviewed and validated by leading audit firms.

If you would like to have a confidential discussion about your specific situation, please do not hesitate to contact us at info@mkd-advisors.com or by completing our contact form.