Definition of PPA
Purchase price allocation (PPA) is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transaction.*
Financial Reporting Requirement
Under IFRS 3 or ASC 805, it is imperative that the fair value of assets and liabilities acquired in a business combination are properly determined.
The fair values of the following that are acquired at acquisition date must be accurately measured:
- Identifiable tangible and intangible assets
- All forms of liabilities assumed, including contingent liabilities
- Any non-controlling interest int he acquired entities
Good to know impact of PPA before completion of M&A
There is an advantage to understand and plan the impact that PPA has in your company’s earnings. Under constantly changing and increasingly complex accounting standards for reporting M&A transactions, the acquirer’s earnings could have some unintended material impact due to high amortization of intangible assets acquired, goodwill write-offs in future years etc as the acquired assets are assessed at fair values in future periods.