Purchase price allocation (PPA) is the process, required under IFRS 3 and ASC 805, of distributing the total consideration paid in a business combination across the identifiable assets acquired and liabilities assumed at their fair values at the acquisition date. Any remaining excess — the amount paid above the fair value of identifiable net assets — is recognised as goodwill. PPA is not a one-time accounting formality; the fair values established at acquisition drive depreciation, amortisation, and impairment calculations for years after the deal closes.
The Four-Step Acquisition Method (IFRS 3)
IFRS 3 requires that every business combination be accounted for using the acquisition method, which has four steps applied in sequence:
- Identify the acquirer — the entity that obtains control of the acquiree. Usually the entity that transfers cash or issues equity to effect the combination.
- Determine the acquisition date — the date on which control passes. This is the date from which the acquiree’s results are consolidated and on which all assets, liabilities, and NCI are measured at fair value.
- Recognise and measure identifiable assets, liabilities, and NCI — all identifiable assets and liabilities of the acquiree are measured at acquisition-date fair value, regardless of their carrying amount in the acquiree’s books.
- Recognise goodwill or a bargain purchase gain — the excess of consideration over net fair value of identifiable assets and liabilities is goodwill. If the net fair value exceeds consideration, the difference is a bargain purchase gain, recognised immediately in profit or loss.
Consideration Transferred — What’s Included and Excluded
The consideration transferred is measured at fair value at the acquisition date. It includes:
- Cash and cash equivalents paid
- Fair value of equity instruments issued by the acquirer (shares, options)
- Fair value of contingent consideration (earn-out arrangements where additional amounts are payable if performance targets are met)
- Fair value of any previously held equity interest in the acquiree (if the acquisition is achieved in stages)
🚩 Transaction costs are excluded from consideration. Legal fees, advisory fees, due diligence costs, and registration fees are expensed in the income statement as incurred, not added to the purchase price or capitalised as goodwill. This is one of the most common errors in post-acquisition bookkeeping — treatment of transaction costs as part of the acquisition cost.
Identifying and Measuring Intangible Assets
PPA requires the acquirer to identify and value intangible assets that the acquiree may not have recognised in its own balance sheet. An intangible asset qualifies for recognition in the PPA if it meets the identifiability criterion — it is either separable (can be sold, licensed, or transferred separately) or arises from contractual or legal rights.
Common intangible assets recognised in PPA:
| Intangible type | Common valuation method | Typical useful life |
|---|---|---|
| Customer relationships | Multi-period excess earnings method (income approach) | 5–15 years |
| Trade names / brands | Relief-from-royalty method | Finite or indefinite |
| Core technology / IP | Relief-from-royalty or income approach | 5–10 years |
| Order backlog | Income approach (PV of backlog margin) | Months to 2 years |
| Non-compete agreements | Differential income (with vs without non-compete) | Clause duration |
Valuing these assets requires judgement and typically involves external valuation specialists. The values assigned have direct ongoing P&L consequences — a customer relationship valued at $2.5M amortised over 10 years generates $250,000 of annual amortisation in the consolidated accounts.
The Deferred Tax Liability on Fair Value Uplifts
When PP&E or intangible assets are uplifted to fair value in the PPA, a taxable temporary difference arises: the carrying amount in the consolidated accounts exceeds the tax base of the asset (which typically remains at the acquiree’s pre-acquisition book value). This temporary difference generates a deferred tax liability (DTL) that must be recognised in the PPA itself — and which reduces the net identifiable assets, increasing goodwill accordingly.
Worked example — full PPA with DTL Company A acquires Company B for $10,000,000 cash. Tax rate: 25%.
| Item | Book value | Fair value uplift | Fair value |
|---|---|---|---|
| PP&E | $2,500,000 | $500,000 | $3,000,000 |
| Inventory | $1,000,000 | — | $1,000,000 |
| Customer relationships | — | $2,500,000 | $2,500,000 |
| Technology | — | $1,000,000 | $1,000,000 |
| Other net assets | $500,000 | — | $500,000 |
| Loans assumed | ($1,000,000) | — | ($1,000,000) |
| Identifiable net assets | $7,000,000 | ||
| DTL on fair value uplifts (25% × $4,000,000) | ($1,000,000) | ||
| Net identifiable assets after DTL | $6,000,000 |
Goodwill = $10,000,000 − $6,000,000 = $4,000,000
Without the DTL, goodwill would be $3,000,000. The DTL adds $1,000,000 to goodwill — a common reason why PPA goodwill exceeds the “back of envelope” calculation.
The 12-Month Measurement Period
IFRS 3 allows a 12-month measurement period from the acquisition date. During this period, if new information emerges about facts and circumstances that existed at the acquisition date, the acquirer may revise provisional PPA amounts — adjusting the relevant assets, liabilities, or goodwill retrospectively as if the final values had been known at acquisition date.
After 12 months, the PPA is final. Changes in estimate after the measurement period are not retrospective adjustments — they are recognised in the period the estimate changes.
Day 2 — The Ongoing Consolidation Impact
The PPA values established at acquisition drive consolidation adjustments that repeat every period for years after the deal closes:
- PPA intangible amortisation: Customer relationships, technology, and other finite-life intangibles are amortised in the consolidated accounts over their useful lives. These amortisation charges exist only at the consolidation level — not in the subsidiary’s own statutory accounts.
- PP&E fair value depreciation: The fair value uplift on PP&E is depreciated over the remaining useful life of the assets. The consolidated depreciation charge exceeds the subsidiary’s own depreciation charge by the annual unwinding of the uplift.
- DTL unwind: As the uplifted intangibles and PP&E are amortised or depreciated, the DTL unwinds — reducing deferred tax liability and generating a deferred tax credit in the consolidated income statement each period.
- Inventory step-up reversal: If inventory was uplifted to fair value at acquisition, that step-up is charged to COGS in the first period after acquisition as the inventory is sold. This creates a one-off, non-recurring charge to consolidated gross profit in the post-acquisition period.
💡 For analyst reporting: PPA amortisation is typically excluded from “adjusted EBITDA” or “underlying earnings” because it is a non-cash accounting consequence of M&A activity rather than an operational cost. Finance teams presenting results to investors should clearly disclose PPA amortisation as a separate line item so the reported and underlying profit figures can be reconciled transparently.
For groups managing PPA amortisation, fair value depreciation, and DTL unwind as ongoing consolidation adjustments — tracked from acquisition date through the full asset life — BrizoConsol provides the consolidation framework to manage these positions period to period with a full audit trail. Learn more or see it in action →