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Purchase Price Allocation

IFRS 3, ASC805, and Indian income tax: Preparation of fair value balance sheet including fair values of intangible assets (such as customer relationships, trademarks, patents and technology), tangible assets and liabilities; allocation to cash-generating units or reporting units

IFRS 3 and ASC 805
Appraising the fair value of assets and liabilities acquired in a business combination is a key requirement of IFRS 3 or ASC 805, both of which stipulate use of the acquisition method to account for business combinations.  

Companies must measure, separately from goodwill, acquisition-date fair values of:

  • Identifiable assets acquired
  • Liabilities assumed
  • Any non-controlling interest in the acquiree

Fair value is defined in IFRS 3 as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”

Fair value is defined in ASC 820 and IFRS 13 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

In addition, in accordance with IAS 36 and ASC 350, companies must allocate the assets and liabilities acquired to appropriate cash-generating units (CGUs) or reporting units.

Identifiable Assets Acquired and Liabilities Assumed
As part of the purchase price allocation, all identifiable assets acquired and liabilities assumed must be recognized and measured at fair value.

IFRS 3, paragraph 13, states “The acquirer’s application of the recognition principle and conditions may result in recognizing some assets and liabilities that the acquiree had not previously recognized as assets and liabilities in its financial statements.”

In practice, this means that in addition to fair value revisions to acquired tangible assets such as property, plant & equipment and inventory, and to liabilities such as deferred income, an acquirer is required to recognize acquired intangible assets the acquiree had not previously recognized because it developed them internally and charged the related costs to expense.

In accordance with IAS 38 and ASC 350, intangible assets are considered identifiable if they:

  • Are separable, that is, they can be sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability (regardless of whether the acquiring entity intends to do so)
  • Arise from contractual or other legal rights, regardless of whether the rights are transferable or separable from the entity or from other rights and obligations

Assets and Liability Fair Values
Business combinations involve determination of the fair value of all classes of tangible assets, intangible assets, and liabilities, including but not limited to:

Tangible Assets Intangible Assets Liabilities
Real Property

Personal Property and
Related Assets

Land
Land improvements
Buildings
Leasehold interests

Machinery and equipment
Furniture and fixtures
Computer equipment
Vehicles
Construction in progress
Leasehold improvements
Trademarks
Patented technology
Unpatented technology
IPR&D
Software
Customer/supplier/distributor relationships
Non-compete agreements
Deferred income
Contingent consideration
Contingent liabilities
Deferred tax

 

Consideration Transferred
The acquisition consideration is measured as the sum of the acquisition-date fair values of:

  • The assets transferred to the acquirer
  • The liabilities incurred by the acquirer to former owners of the acquiree
  • Equity interests incurred by the acquirer

If part of the consideration transferred is contingent consideration, such as an earn-out, the acquirer recognizes the fair value of the contingent consideration.  The fair value of the contingent consideration is the present value of the amount the acquirer expects to pay.

If the consideration transferred includes assets or liabilities of the acquirer that have carrying amounts different to their acquisition date fair values, the acquirer is required to re-measure the transferred assets or liabilities to their fair value and recognize any resulting gains or losses in profit or loss.

Cash-Generating Units
IAS 36 states “for the purposes of impairment testing, goodwill acquired in a business combination shall, from the date of acquisition, be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.”

IAS 36 defines a Cash-Generating Unit as “the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.”

This gives rise to a requirement to identify the acquirer’s cash-generating units that will benefit from the business combination.  Alternatively, if the acquirer’s existing cash-generating units are not expected to benefit from the business combination, in whole or in part, it necessitates the identification of new cash-generating units relating to the acquiree.

If this process results in the identification of multiple independent cash inflows within the acquiree, the allocation of goodwill to cash-generating units, as required by IAS 36, necessitates:

  • Allocating the purchase price paid for the acquiree between each of its independent cash inflows (i.e., determine the fair value contribution of the acquiree to existing and new cash-generating units); and
  • Apportioning the fair value of the identified intangible assets, along with other acquired assets and liabilities, to each identified cash-generating unit.

Non-controlling Interest in an Acquiree
A non-controlling interest in the acquiree is re-measured to fair value, with any resulting gain or loss taken to profit or loss.  The inclusion of a discount for lack of control (minority discount) in the per-share fair value of the non-controlling interest may mean the fair value of the non-controlling interest is different to the price paid per-share to gain control of the acquiree.

Our Work
American Appraisal performs hundreds of purchase price allocations for financial reporting purposes annually.  American Appraisal consultants, both in India and across our network of global offices, offer valuation expertise across all assets and liabilities to assist in the determination of the fair value of:

  • Tangible assets
  • Intangible assets
  • Liabilities
  • Cash-generating units or reporting units
  • Equity investments & joint ventures
  • Contingent consideration
  • Non-controlling interests in the acquiree

American Appraisal consultants are active in:

  • the International Valuation Standards Council
  • the Appraisal Issues Task Force
  • the FASB’s Valuation Resources Group
  • the Appraisal Foundation
  • the American Society of Appraisers
  • the American Institute of CPAs

This involvement ensures our knowledge of current financial reporting standards, practices and procedures.

Purchase price allocations performed by American Appraisal result in:

  • Independent, objective and supportable fair value opinions
  • Clear, comprehensive valuation reports