Purchase Price Allocation: how to facilitate access to PPA data?

Since the adoption of IFRS 3 in 2009, companies that take control of another company are subject to an obligation with financial implications that are still underestimated: the Purchase Price Allocation. The PPA consists of translating, within the consolidated accounts of the acquiring company in the year following the transaction, the full acquisition price of the target. This is a difficult exercise, as companies are generally acquired at a price which is higher than the net book value entered on the balance sheet, but it is also a high-stakes exercise: an incorrect PPA can seriously affect the company's income statement and financial communication. What are the issues surrounding PPA data? How can financial analysts access reliable data and, if possible, avoid data crunching? Let’s see.

Purchase Price Allocation: a short definition

Company A is considering acquiring company B with a book value of 15 million euros for 20 million euros. The 5 million euros of goodwill are mainly intangible assets that are likely to generate future economic benefits: brand, patents, technologies, contracts, customer lists, etc. These intangible resources are often absent from the balance sheet of the acquired company. PPA is about "putting a price" on the tangible and intangible assets, by analyzing how they were valued to arrive at the acquisition price.

If the merger/acquisition takes place, this allocation will have to be integrated into the consolidated accounts of the acquirer, in accordance with IFRS 3 , IAS 38 and IAS 36 . These standards require the assets and liabilities of the acquired company to be revalued based on their "fair value" , defined as "the price that would be received for the sale of an asset or paid for the transfer of a liability in an arm's length transaction between market participants at the measurement date".

The different steps of the purchase price allocation:

To make this allocation, the financial experts:

- analyze the transaction

- estimate the fair value of the assets and liabilities

- assess the useful life of the assets

- rationalize the purchase price and the residual goodwill

In our example, after acquiring company B, company A will therefore break down the acquisition price by reallocating it in its accounting records to the assets and liabilities of company B (estimated at their fair value). Once this step has been completed, only a residual amount corresponding to the goodwill of company B will remain. Company A will then have 12 months to determine the best way to allocate this residual amount to its various cash generating units.

For the acquiring company, the challenge is both to promote the synergies expected from this merger/acquisition and to limit the risks of future impairment. The more reliable its valuation model, the more it limits the risk of seeing one or more assets impaired from one year to the next - which would result in losses in its income statement.

Intangible assets are not always depreciated on a regular basis (their useful life is often too uncertain), but they are subject to an annual impairment test under IFRS. Thus, goodwill can contribute to the long-term success of a company, as well as being subject to very significant one-off impairments from one year to the next.

Purchase Price Allocation: a strategic tool for financial analysts

Traditionally, analysts are wary of goodwill, which is by definition difficult to value. But at a time when intangible assets are becoming an increasingly important part of a company's acquisition price, it seems essential to integrate these "intangible" factors into the method used to value a company. PPA data therefore provides important information on the financial situation of a company, and is an important tool for financial decision making.

Certain red flags can alert analysts. A PPA that reveals overvalued assets - which would put the company at risk of future impairment - can save the company from a bad acquisition decision. Poor financial reporting can also signal a poor valuation of goodwill. Finally, a sector benchmark, comparing the PPPs of several companies in the same sector, can alert if the valuation of a company is much higher than its competitors.

Purchase Price Allocation: how to access PPA data?

While PPA data is a goldmine for analysts, accessing this data can be difficult. The most obvious reason is that APPs are only required following a merger/acquisition. A company that is not involved in such transactions has no obligation to accurately estimate and allocate its goodwill, nor to disclose this information.

But even when an acquisition has taken place, it is often a tedious and time-consuming task to find this data in documents that are hundreds of pages long - with no certainty of finding quality information . Not to mention that companies have a year to publish this data, which further extends the time to access the information.

LENS: a solution to avoid data crunching

Fortunately, as in most data-driven industries, technological solutions are emerging as an alternative to these time-consuming methods. For the PPA, the platform offers a radical change by providing direct access to company data . This automated solution allows, depending on the needs, to access raw data or to benchmark the PPA of several companies, or even of a specific sector.

No more data crunching: the information is instantly available in downloadable files in the required format - which not only simplifies the analyst's work, but also avoids the errors associated with copying and pasting from PDF documents found on company websites.

Automating the reading of PPA data thus has the advantage of saving valuable time for financial experts, but also for decision-makers who want to base their decisions on complete and reliable information.

With LENS, you can easily browse through huge amounts of data. In addition to saving a considerable amount of time, this tool allows you to make your analyses more reliable and to make all possible comparisons . Would you like to know more? Request a LENS demo!