Purchase Price Allocation

According to all current accounting standards - HGB, IFRS and US-GAAP - the initial consolidation of an acquired company is associated with a purchase price allocation (purchase price allocation/ PPA). The difference between the purchase price and the carrying amount of the acquired equity is distributed between the assets, liabilities and contingent liabilities recognised and not recognised. The measurement is based on a fair value concept, that is, at current fair value and is regulated, for example, by the International Accounting Standards Board (IASB) in the "IFRS 3 Business Combinations" standard.

The implementation of a PPA requires detailed knowledge of the sophisticated valuation models to be used and is therefore audited by the auditing companies by specialists and gladly also by the Federal Financial Supervisory Authority (BaFin) examined. The experienced consultants of WTS Advisory will guide you safely through the PPA process.

Integration of purchase price allocation into the M&A process

Depending on the transaction volume and transaction structure, the purchase price allocation has a significant impact on the balance sheet, control and performance indicators and thus also on the external presentation of the Group to the capital market and investors. Important key figures such as earnings per share (earnings per share/EPS) or EBIT are sustainably influenced by the PPAs.

Due to the influence on the external presentation of the Group, it is therefore advisable to involve the PPAs in the M&A process of business consulting. The implementation of a PPA, which is integrated into the M&A process, is also referred to as a Pre-Deal PPA. As part of such a process, the material intangible assets of liabilities and contingent liabilities, as well as goodwill, are already measured in the purchase process in accordance with the business plan and valuation. This enables an early assessment of the accounting effects and effects of the transaction on the balance sheet and future results. A finalization can then take place after the closing of the deal or after the company valuation.

Expiration of a purchase price allocation

The steps of a pre deal or a regular purchase price allocation are essentially identical. Potential hidden charges or hidden reserves must be identified, detected and measured at fair value for the consolidated balance sheet in accordance with IFRS 3 or DRS 23. Items that have already been recognised in the balance sheet of the acquired company, such as land, machinery or inventories, are recognised at market values.

Intangible assets have a much more significant impact on the balance sheet of the acquired company. Customer relationships, trademarks and technology are subject to an accounting ban, but must be evaluated here and recorded in the balance sheet. The standard provisions are thus undermined by IFRS 3 or DRS 23. In the absence of comparable transactions, discounted cash flow models recognized in valuation practice are used, meaning that the business plan is used. In particular, the valuation of intangible assets is critically examined by BaFin against the background of the considerable scope for design.

Preparation of a purchase price allocation by WTS Advisory

Within a PPA project, we accompany your company in all steps. In discussions, we identify intangible assets or goodwill and examine necessary adjustments in the balance sheet. Our valuation approaches are already known and established by all major auditing companies. As soon as we have completed our valuation models for you, we will discuss the effects on your future business results and other key figures and advise you on possible adjustments and future risks from impairment tests. We also take over the coordination with the auditor for you. In the end, we document our work in a focused report that contains all material assumptions and valuation parameters.

Also for all other topics related to purchase price allocation, such as questions about initial consolidation, the valuation of complex options and put/call structures regarding company shares, The valuation of earn-outs as well as the distinction between purchase price and manager remuneration are always available to you by our accounting experts with an independent assessment.

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