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Purchase Price Allocation

What is Purchase price allocation?
Practice of allocating the purchase consideration (PC) paid to acquire an asset/business into tangible and intangible assets and liabilities as at the Acquisition date. Valuation is done for the Acquisition date.
Residual purchase consideration is recorded as goodwill/bargain purchase in the acquiring company’s books.

PPA is required as per the IND AS 103 – Business Combination
IND AS 103 does not apply to:
Formation of joint arrangements
Acquisition of an asset or a group of assets that does not constitute a business.

What constitutes a Business Combination?

A transaction or an event where the Acquirer obtains control (i.e. Power to govern the financial and operating policies of an entity to obtain benefits from its activities) of one or more business structure-based on legal /tax considerations

  • Legal merger
  • The former owner obtains control of the combined entity
  • Combination of mutuals to form a new entity
  • Acquisition of Business by the Acquirer
  • Acquisition of a majority stake in an entity
  • Power to govern the financial and operating policies of an entity to obtain benefits from its activities

Purchase Price Allocation Framework

Ind AS 113 - Fair Value Measurement and Ind AS 103 - Business Combinations provide a framework for Purchase Price Allocation. A summarized framework of Purchase Price Allocation is given hereunder:

  • Identification of Acquirer
  • Determination of Acquisition Date
  • Determination of Purchase Consideration
  • Evaluate Prospective Financial Information
  • Identification and Valuation of assets acquired: All the Assets of Acquiree under each category i.e. Tangible, Intangibles are identified and valued.
  • Allocation of the Purchase Consideration: The Purchase consideration determined is allocated to the identified Tangible, Intangible, and Monetary assets. Any amount of consideration paid in excess of Net Assets acquired under the transaction is recognized as Goodwill.