When a business is acquired, the accounting does not stop at the purchase price. Under IFRS 3 Business Combinations and FRS 102, management is required to allocate the consideration paid to the identifiable assets acquired and liabilities assumed at their fair values at the acquisition date. This process is known as a Purchase Price Allocation (PPA).
A PPA is a core part of acquisition accounting. It determines the opening balance sheet for the acquired business, the amount of goodwill recognised and, in many cases, the future pattern of amortisation, impairment and reported earnings. It is also an area that often attracts detailed audit attention, particularly where the transaction involves significant intangible value.
For many acquisitive businesses, the most important part of the exercise is identifying and valuing intangible assets that were not previously recognised in the target’s own financial statements. Customer relationships, brands, software, intellectual property and contractual rights can all represent a significant part of the purchase consideration. A robust PPA helps ensure these assets are recognised appropriately and that the accounting reflects the commercial reality of the transaction.
Under IFRS 3 and FRS 102, a PPA is carried out as part of the acquisition method and follows a structured process.
This typically involves:
While the framework is prescribed by the accounting standards, the practical application often involves significant judgement. In particular, management needs to consider which assets are separately identifiable, how they should be valued, and how the resulting accounting treatment will affect future financial reporting.
Our valuation specialists can help deliver a clear, robust and audit-ready PPA under IFRS 3 and FRS 102
One of the most judgement-sensitive aspects of a PPA is the identification of intangible assets.
Under IFRS 3, intangible assets must be recognised separately from goodwill where they are identifiable. In practice, this generally means assets that are capable of being separated and transferred, or which arise from contractual or legal rights.
Under FRS 102, the principles are broadly similar, but the outcome can be more restrictive in practice. This can mean that fewer intangible assets are recognised separately, with more of the transaction value remaining within goodwill. The distinction is important because it can affect the post-acquisition balance sheet, future amortisation and the overall profit profile following the acquisition.
This is an area where technical judgement matters. The question is not simply how to value an asset once it has been identified, but also whether the accounting framework requires that asset to be recognised separately in the first place.
The intangible assets identified in a PPA will depend on the nature of the business acquired and the factors that underpin its value. Common examples include:
In many acquisitions, these assets have never been recognised in the target’s standalone accounts. However, they may still need to be identified and measured as part of the acquisition accounting exercise.
A PPA is not simply a compliance exercise. The conclusions reached can have a material effect on future financial reporting and are often highly relevant to finance teams, boards, lenders, investors and auditors.
The allocation between identifiable intangible assets and goodwill can affect:
Where a PPA is not performed robustly, the result can be overstated goodwill, misreported earnings or unnecessary difficulty during the audit process. For acquisitive groups and businesses subject to external scrutiny, it is therefore important that the analysis is technically sound, proportionate and clearly documented.
The valuation of assets within a PPA requires methodologies that are appropriate to the asset being assessed and consistent with the underlying economics.
Depending on the facts, this may involve:
The choice of methodology is important, but so too is the quality of the underlying assumptions. Forecast performance, attrition, contributory asset charges, discount rates and tax effects can all be key drivers of value and are often areas of focus for auditors.
Although IFRS 3 and FRS 102 are broadly aligned in requiring fair value acquisition accounting, the differences between the frameworks remain important in practice.
Under IFRS, goodwill is not amortised but is subject to impairment testing. Under FRS 102, goodwill is amortised over its useful economic life. The frameworks can also differ in practice in relation to the separate recognition of intangible assets and the extent of disclosure required.
These differences mean that the applicable accounting framework can materially affect the outcome of the PPA and the way the acquisition is reflected in subsequent financial statements. This is particularly relevant as FRS 102 continues to develop and businesses consider how the latest changes interact with acquisition accounting and broader reporting expectations.
At Price Bailey, we approach PPA work with a combination of technical rigour and commercial pragmatism. We understand that management needs more than a theoretical answer: the analysis has to work in practice, stand up to audit scrutiny and be proportionate to the nature of the transaction.
Our role is to help management apply the requirements of IFRS 3 and FRS 102 in a clear, supportable and commercially grounded way. That includes identifying the relevant assets, applying appropriate valuation methodologies, documenting the basis of the conclusions reached and supporting finance teams through the audit process where required.
For acquisitive groups, private businesses and investor-backed companies alike, a well-executed PPA can provide both compliance and clarity. Our focus is on helping clients achieve both.
The process normally takes approximately 4 weeks.
You’ll need to provide access to historical records, including those associated with customer relationships if these are being valued. This typically includes data from the past few years to assess trends and stability.
You’ll also need to compile intellectual property (IP) documents, such as patents and trademarks, including their renewal dates and an assessment of the benefits they bring to the business. Additionally, information on design assets, such as logos, may be required to evaluate their contribution to overall value.
Developing appropriate forecasts and business plans can help to support the long-term assessment of value.
Contact us today to find out more about how we can help you
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