The first-time consolidation of an acquired company is connected with a purchase price allocation (PPA) under all conventional accounting standards – the German Commercial Code [Handelsgesetzbuch, HGB], IFRS, and US GAAP. The difference between the purchase price and the carrying amount of the acquired equity is allocated to the reported and non-reported assets, liabilities, and contingent liabilities. The valuation takes place in accordance with the fair value concept, i.e. at the fair value, and is governed e.g. by the International Accounting Standards Board (IASB) in standard IFRS 3 "Business Combinations."
The completion of a PPA requires detailed knowledge of the complex valuation models to be used and is therefore checked by specialists at auditing firms and also often examined by the German Financial Reporting Enforcement Panel [Deutsche Prüfstelle für Rechnungslegung, DPR]. The experienced advisors at FAS AG will guide you safely through the PPA process.
Inclusion of Purchase Price Allocation in the M&A Process
Depending on the transaction volumes and transaction structure, the purchase price allocation has a significant impact on the balance sheet and the controlling and key performance indicators, and thus also on the external presentation of the corporation on the capital market and to investors. Important metrics such as earnings per share (EPS) or EBIT are influenced by the PPA over the long term.
The influence on the external presentation of the corporation means that it makes sense to integrate the PPA in the M&A process. The completion of a PPA integrated in the M&A process is also referred to as a pre-deal PPA. In such a process, the material intangible assets, liabilities and contingent liabilities as well as the goodwill are valued in relation to the business plan and the valuation as part of the purchase process. An early estimate of the balance sheet effects and impact of the transaction on the balance sheet as well as the future earnings is possible as a result of this. A finalization can then take place after the closing of the deal or the corporate acquisition.
Course of a Purchase Price Allocation
The steps in a pre-deal or a regular purchase price allocation are identical for the most part. Potential hidden liabilities or reserves must be identified, disclosed, and measured at fair value for the consolidated balance sheet in accordance with IFRS 3 or DRS 4. Positions that were already reported on the balance sheet of the acquired company such as properties, machines, or inventories are recognized at market values.
Intangible assets have a disproportionately large impact on the balance sheet of the acquired company. Customer relationships, brands, and technology are subject to an accounting prohibition, but must be valued here and reported on the balance sheet. The standard rules are also expanded by IFRS 3 and DRS 4. If there is a lack of comparable transactions, recourse is taken to the discounted cash flow model recognized in valuation practice, i.e. the business plan. In particular, the valuation of intangible assets is examined critically against the backdrop of the significant discretionary leeway allowed by the German Financial Reporting Enforcement Panel (Deutschen Prüfstelle für Rechnungslegung, DPR).
Preparation of a Purchase Price Allocation by FAS AG
In a PPA project, we will support your company at each step. In meetings we will identify the intangible assets and the goodwill, and examine the necessary adjustments on the balance sheet. Our valuation methods are already known and established at all leading auditing firms. As soon as we have completed our valuation models for you, we will discuss the impact on your future corporate earnings and other key performance indicators and advise you regarding possible adjustments and future risks from impairment tests. In the process we will also take over coordination with the auditor for you. Finally, we will document our work in a concise report that contains all the major assumptions and valuation parameters.
Our accounting experts are also available with an independent opinion at any time for all other subjects related to the purchase price allocation, such as questions on the first consolidation, valuation of complex options and put/call structures in regard to company shares, the valuation of earn-outs, and differentiation between the purchase price and the manager remuneration.