What is Purchase Price Allocation (PPA) Valuation?
In Singapore, Purchase Price Allocation (PPA) valuation is an essential process that occurs when a business acquires another entity. PPA valuation determines the fair value of the acquired company’s assets and liabilities and helps determine how much goodwill should be recorded on the acquiring company’s balance sheet.
PPA valuation is a complex process that requires careful analysis and consideration of various factors. The process involves allocating the purchase price of the acquired company to its assets and liabilities based on their fair value. This is done to ensure that the acquiring company’s balance sheet accurately reflects the value of the assets and liabilities acquired.
When a company acquires another, the acquisition price must be broken down into identifiable assets and liabilities in a consolidated balance sheet for accounting purposes.
For this, based on the currently accepted accounting standards, the purchase price allocation (PPA) method can be employed for all types of business combination deals, including mergers and acquisitions.
Steps in a Purchase Price Allocation
There are several steps involved in PPA valuation. The first step is to identify the assets and liabilities of the acquired company. This includes tangible assets such as property, plant, and equipment, as well as intangible assets such as patents, trademarks, and customer relationships. Liabilities include any outstanding debts, such as loans or accounts payable.
The second step is to determine the fair value of each asset and liability. This is typically done using a combination of valuation techniques, including market-based, income-based, and cost-based approaches. The valuation techniques used will depend on the nature of the asset or liability being valued.
Once the fair value of each asset and liability has been determined, the purchase price can be allocated accordingly. Any excess purchase price over the fair value of the assets and liabilities acquired is recorded as goodwill. Goodwill represents the future economic benefits that the acquiring company expects to receive from the acquisition.
Components of Purchase Price Allocation
To understand the PPA method and how it works, let us first look at its main components listed as follows:
Net Identifiable Assets
Net identifiable assets are used to determine the book value of assets on the balance sheet of the acquired company; and they include both tangible and intangible assets. These assets are derived from the total value of assets minus the total amount of liabilities. Their value is usually ascertained at a given point in time, and their benefits are recognizable and reasonably quantifiable.
Goodwill
Goodwill is the difference between the purchase price and total value of the assets and liabilities of the acquired company. Hence it is usually seen as the extra amount paid, which does not depreciate but amortizes over time. Though an intangible asset, goodwill is still critical for accounting reports. Hence a company must at least once every year re-evaluate all its recorded goodwill, and when necessary record its damage adjustments.
Write- up
A write-up is the increment in the book value of an asset if its carrying value is lower than its fair market value, normally determined by an independent business valuer who assesses the fair market value of the acquired company’s assets.
Having understood the components, we can now use the following example to understand the PPA model.
Scenario: Company X acquires company Y for $10 billion. To complete the deal, company X will have to perform a purchase price allocation.
So using the PPA model, firstly, Company Y’s assets have a book value of $7 billion and its liabilities are worth $4 billion. The value of its net identifiable assets is then $3 million.
Next, the independent business valuation specialist assessed the fair value of both assets and liabilities of Company Y to be $8 billion, so Company X has to now recognise a $5 billion write-up.
Since the acquisition price paid was $10 billion, which exceeds the net identifiable assets and write-up cost, Company X needs to record a goodwill of $2 million.
It is worthy to note that acquisition-related costs are not inclusive of the various legal, advisory and consultation fees as these payments are not part of the purchase price allocation.
Importance of Purchase Price Allocation
PPA is an important process as it has a significant impact on the acquiring company’s financial statements. The fair value of the assets and liabilities acquired is recorded on the acquiring company’s balance sheet, which can affect its financial ratios and performance indicators. Additionally, the amount of goodwill recorded can have implications for the company’s future financial performance.
In Singapore, PPA is typically performed by professional valuation firms that specialize in this area. These firms have the necessary expertise and experience to perform the complex analysis required for PPA valuation. Additionally, they can provide objective and independent opinions on the fair value of assets and liabilities acquired, which is important for ensuring accuracy and reliability.
Conclusion
PPA valuation is an important process in Singapore that helps ensure the accuracy and reliability of a company’s financial statements following an acquisition. It involves a careful analysis and consideration of various factors to determine the fair value of assets and liabilities acquired, as well as the amount of goodwill to be recorded. Professional valuation firms can provide valuable expertise and experience in performing PPA valuation, ensuring accuracy and reliability.
The role of a business valuer is to provide the acquiring company a detailed and comprehensible report of the valuations and effects on the non-tangible assets and goodwill of the acquired company. They offer user-friendly audit processes and supply the necessary information for meeting the extensive disclosure requirements related to purchase price allocation PPA.
Speak with a purchase price allocation PPA specialist today.
