Purchase Price Allocation (PPA)
What is Purchase Price Allocation (PPA)?
PPA is the process of assigning a fair value to all the assets acquired and liabilities assumed during a business acquisition. This is required under International Financial Reporting Standards (IFRS) for companies that compile financial statements based on them, following a merger or acquisition.
Why is PPA important in Singapore?
PPA ensures accurate financial statements for the acquiring company. Here's how:
Fair value representation: PPA assigns a fair market value to the acquired company's assets and liabilities, providing a more accurate picture of the acquiring company's financial health.
Investor confidence: Investors rely on financial statements to make decisions. Accurate allocation through PPA builds trust and transparency.
Compliance with IFRS: Following IFRS is mandatory for many companies in Singapore. Proper PPA adherence ensures compliance.
Steps in Purchase Price Allocation
Here's a simplified breakdown of the PPA process:
Determine the purchase price: This includes the cash paid, the fair value of any shares issued, and any debt assumed by the acquirer.
Identify and value identifiable assets and liabilities: This includes tangible assets like property and equipment, intangible assets like trademarks, and liabilities like outstanding loans.
Fair value any previously unrecorded intangible assets: Identify any intangible assets not on the target company's books and assign them a fair value.
Estimate deferred taxes: Changes in fair value may result in deferred tax obligations, which need to be accounted for.
Record the difference as goodwill or gain from bargain purchase: The difference between the purchase price and the total fair value of identified assets and liabilities is recorded as goodwill (if positive) or gain from bargain purchase (if negative).
How to allocate purchase price?
Allocating the purchase price in a business acquisition involves a multi-step process to ensure each acquired asset and liability is valued fairly. Here's a breakdown of the key steps:
1. Determine the Purchase Consideration:
This is the total cost of acquiring the target company. It includes:
Cash paid upfront
Fair value of any shares issued by the acquiring company
Fair value of any debt assumed from the target company
2. Identify and Value Identifiable Assets and Liabilities:
Here, you meticulously list and assign a fair market value to all the assets and liabilities of the acquired company. This includes:
Tangible assets: Property, machinery, equipment, inventory, etc. (often appraised)
Intangible assets: Trademarks, patents, copyrights, customer lists, brand reputation, etc. (valuation can involve complex methods)
Financial assets: Cash, investments, accounts receivable, etc. (usually valued at fair market value)
Financial liabilities: Loans payable, accounts payable, etc. (valued at their carrying amount)
3. Identify and Value Previously Unrecorded Intangible Assets:
Sometimes, the target company might possess valuable intangible assets not reflected on their books. Examples include:
Customer relationships
Developed technological know-how
Specialized licenses or permits
These assets need to be identified and assigned a fair value through specific valuation techniques.
4. Estimate Deferred Taxes:
Assigning fair values to assets and liabilities can have tax implications. You'll need to estimate any deferred tax obligations arising from these changes in fair value.
5. Allocate Remaining Amount: Goodwill or Gain from Bargain Purchase
The final step involves calculating the difference between the total purchase consideration and the combined fair value of all identified assets and liabilities. This difference is recorded
as:
Goodwill: If the purchase price is higher than the fair value of all the identified assets and liabilities, the difference is considered goodwill. It represents the intangible value of the target company, such as its reputation, customer base, or future earning potential.
Gain from Bargain Purchase: Conversely, if the purchase price is lower than the fair value of the identified assets and liabilities, the difference is recorded as a gain from bargain purchase.
What is purchase price allocation in FRS 103?
FRS 103, also known as Singapore Financial Reporting Standard 103, deals with Business Combinations. Within this standard, purchase price allocation (PPA) plays a vital role. Here's how FRS 103 governs PPA:
Core Principle:
FRS 103 mandates that the purchase price of an acquired business be allocated to the identifiable assets, liabilities, and contingent liabilities assumed by the acquirer. This allocation is based on their fair value at the date of acquisition.
Steps in FRS 103 PPA:
Identify Individual Assets and Liabilities: FRS 103 emphasizes identifying all identifiable assets and liabilities acquired, including those that meet the definition of intangible assets in FRS 38 (Intangible Assets).
Fair Value Measurement: Each identified asset, liability, and contingent liability needs to be measured at its fair value on the acquisition date. FRS 103 provides guidance on using market data or other valuation techniques to determine fair value.
Allocation of Purchase Price: The total purchase price of the acquisition is then allocated to the fair values of the identified individual assets, liabilities, and contingent liabilities.
Goodwill or Gain from Bargain Purchase:
Goodwill: If the total purchase price exceeds the combined fair value of all identified assets and liabilities, the difference is recognized as goodwill. Goodwill represents the intangible value of the acquired business, such as its brand reputation, customer base, or future earning potential.
Gain from Bargain Purchase: Conversely, if the purchase price is lower than the fair value of the identified assets and liabilities, the difference is recognized as a gain from a bargain purchase.
Key Points from FRS 103:
FRS 103 focuses on fair value allocation, ensuring a more accurate picture of the acquiring company's financial health.
The standard provides a framework for identifying and valuing various assets and liabilities, including intangible assets.
FRS 103 acknowledges the potential for goodwill or gain from a bargain purchase arising from the allocation process.
What are the effects of purchase price allocation?
Purchase price allocation (PPA) has several significant effects on both the acquiring company's financial statements and its future financial performance. Here's a breakdown of the key impacts:
Effects on Financial Statements:
Improved Accuracy: PPA assigns fair values to acquired assets and liabilities, providing a more accurate representation of the acquiring company's financial position. Investors and creditors gain a clearer picture of the company's true value.
Impact on Balance Sheet:
Increased Asset Values: Identified assets like property, plant, and equipment, and intangible assets like trademarks, are reflected at their fair value, potentially increasing the total assets on the balance sheet.
Recognition of Goodwill: If the purchase price is higher than the fair value of all identified assets and liabilities, the difference is recognized as goodwill on the balance sheet.
Potential Liabilities: Previously unrecorded liabilities of the acquired company may be identified during PPA, affecting the liabilities section of the balance sheet.
Impact on Income Statement:
Depreciation and Amortization: Increased asset values due to PPA can lead to higher depreciation and amortization expenses in the income statement, impacting profitability.
Goodwill Impairment: Goodwill is subject to annual impairment testing, which could result in charges to the income statement if its value is deemed to have declined.
Effects on Future Financial Performance:
Profitability: Higher depreciation and amortization expenses arising from PPA can decrease reported profits in the short term.
Long-term Value Creation: A successful acquisition, reflected by a positive fair value for intangible assets like brand or customer base, can contribute to long-term value creation for the acquiring company.
Investor Perception: Accurate financial statements showcasing the true value of the acquired company can positively impact investor confidence and potentially lead to a higher stock price.
Additional Considerations:
PPA can be a complex process, and the accuracy of valuations can significantly impact the financial statements.
Skilled professionals like chartered accountants or valuation specialists are often needed to ensure a proper and defensible PPA process.
The effects of PPA can vary depending on the specific nature of the acquisition and the fair values assigned to the acquired assets and liabilities.
Overall, while PPA can have short-term implications on profitability, it's a crucial accounting practice that promotes transparency and informs stakeholders about the true value of a business combination. When done correctly, PPA can contribute to a more informed decision-making process for investors and management.
Additional Tips:
There are various valuation methodologies used for different asset types. Selecting the appropriate method is crucial for accurate allocation.
Documentation is essential. Maintain detailed records of the valuation process and the rationale behind assigned fair values.
By following these steps and seeking professional help when needed, you can ensure a fair and accurate allocation of the purchase price in your business acquisition.
Getting Help with PPA in Singapore
PPA can be complex and requires expertise in valuation and accounting. Bestar in Singapore offers Purchase Price Allocation services, which can guide you through the process.
Here's how Bestar can help with purchase price allocation (PPA) in Singapore:
Expertise in Accounting and Valuation:
Bestar is a firm with chartered accountants and valuation specialists. This combination of expertise is crucial for PPA, as it involves both accounting and valuation principles.
Bestar understands the intricacies of FRS 103 (Singapore Financial Reporting Standard 103) which governs business combinations and PPA.
Bestar possesses the skills and experience to determine the fair value of various assets and liabilities involved in an acquisition, including complex intangible assets.
Services Offered by Bestar:
PPA Planning and Execution: Bestar can guide you through the entire PPA process, from identifying and valuing assets and liabilities to allocating the purchase price and recording goodwill or gain from bargain purchase.
Valuation Services: We can provide valuation services for various assets acquired, including tangible assets like property and equipment, and intangible assets like trademarks and customer lists.
FRS 103 Compliance: Bestar can ensure your PPA process adheres to the requirements of FRS 103, promoting transparency and defensibility in your financial statements.
Documentation and Support: We can assist with documenting the PPA process, including valuation methodologies used and rationale behind fair value estimates.
Inquire with Bestar about the specific PPA services we offer.
By leveraging the expertise of Bestar, you can ensure a smooth and accurate PPA process for your business acquisition, fostering transparency and informed decision-making.
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