Purchase Price Allocation

Purchase price allocation allocates the purchase price paid in an acquisition to the individual acquired assets and liabilities. Any amount above their value is recognised as goodwill. This allocation forms the basis for how the acquisition is reflected in the balance sheet.

Under IFRS 3 the process follows a fixed scheme: the acquisition date is determined, then all assets acquired and liabilities assumed are measured at fair value, expressly including previously unrecognised intangibles such as customer relationships, order backlog, brands, technology and non-compete agreements. Only the remainder is recognised as goodwill. The allocation is not economically neutral: identified intangibles with finite useful lives are amortised over those lives and therefore depress reported earnings in later years, while goodwill under IFRS is only tested for impairment.

A high valuation of such amortisable items therefore reduces reported earnings in subsequent years. Where the tax bases do not increase correspondingly, deferred tax liabilities may arise on the recognised fair value uplifts and increase the residual goodwill. Under German GAAP the question arises differently, because goodwill must be amortised there. In an asset deal, the tax allocation of the purchase price can increase the depreciable tax basis and thereby change future tax payments.

Items typically recognised for the first time include customer relationships, brands, technology and order backlog, each requiring an assessment of its useful life. IFRS 3 allows a measurement period of up to twelve months after acquisition. Valuation is regularly carried out by external experts, because the choice of method directly determines the future charge to earnings.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.