Purchase price allocation (PPA)
Purchase price allocation is an accounting methodology used when one company purchases a second company, and the purchase price is allocated into the assets and liabilities acquired from the transaction. After the takeover, the estimated asset values must often be reported as part of a PPA analysis, performed in accordance with IFRS or local GAAP (e.g. Dutch Gaap) requirements.
A purchase price allocation also involves valuing the intangible fixed assets at the market price to provide insight into the goodwill paid. This is done by allocating the goodwill to the relevant cash-generating units (CGUs). A CGU is the smallest identifiable group of assets that generates cash inflows and is largely independent of the cash inflows from other assets or group of assets.
How do we conduct purchase price allocations?
A purchase price allocation consists of the following steps:
What price has been paid, and what is the value of the company?
What are the expectations for future cash flows?
What annual rate of return on investments is presumed?
What tangible and intangible assets does the company have (e.g. brand name, customer base, contracts, intellectual property).
What is the value of these assets?
What is the value of goodwill (residual amount left over after subtracting all the identified tangible and intangible assets from the acquisition price)?
Wingman can conduct a purchase price allocation, assess a purchase price allocation that has been prepared by you, or act as critical sparring partner for your accountant at decisive strategic moments. Our experience and knowledge of the valuation methods used to value intangible fixed assets – from the Excess Earnings and Relief from Royalty methods to cost approach – enables us to provide a superior level of service. We know how to apply these methods effectively and understand the relationship between the various elements of which a purchase price allocation is made up.