Purchase price allocation

The purchase price allocation ( English Purchase Price Allocation , PPA ) is a method of corporate accounting . It is used when a newly acquired company is included in the consolidated financial statements of the parent company for the first time and is used to “distribute” the purchase price among the individual assets and liabilities taken over . Differences between the purchase price and the book value of the acquired company are compensated for.

A purchase price allocation also takes place when the assets are taken over directly via an asset deal .

The exact procedure depends on the accounting standard used, e.g. B. IFRS or HGB .

Purchase price allocation according to IFRS

The IFRS purchase price allocation is regulated in IFRS 3 .

method

First of all, the purchase price for the participation must be known. In addition to payments already made, this can also include future payment obligations to the seller, e.g. B. earn outs , while incidental acquisition costs according to IFRS 3 can no longer be capitalized . Liquidity stocks taken over with the company are deducted.

Example of a revaluation balance sheet

In the next step, a revaluation balance sheet of the acquired company is prepared in accordance with IFRS 3.36 , in which the individual assets, debts and contingent liabilities taken over are identified (“identified”) and valued according to IFRS 3.37 according to their fair values . I.e. all known hidden reserves and burdens are revealed in the balance sheet of the participation. This can also include intangible assets that were previously not capitalized, such as B. the value of customer relationships, contracts, patents or brand names. The valuation may depend on the expected synergies from the company acquisition.

If the purchase price falls below the book value of the newly valued investment - this is referred to as negative goodwill ( badwill ) - the difference is booked as income and thus (after taxes) added to equity . If, however, the purchase price on the book value, then the difference as a positive goodwill is (engl. Goodwill ) activated.

Approach requirements

IFRS 3.37 specifies which additional assets and liabilities may be recognized in the revaluation. The following criteria apply for this:

• In principle, the fair value of the position must be reliably determinable.
• In the case of tangible assets, it must also be probable that they are associated with a corresponding future economic benefit that will accrue to the purchaser.
• In the case of intangible assets, the special recognition criteria for intangible assets in accordance with IAS 38 must also be observed. This strict regulation takes into account the fact that the distinction between other intangible assets and - likewise intangible - goodwill is problematic (see below ).
• With regard to liabilities and provisions (= debts), it is required that the underlying obligations are likely to lead to a corresponding outflow of funds. According to IFRS 3.41, only those debts that already existed at the time of acquisition at the target company may be recognized.
• For the identification of contingent liabilities, IFRS 3 refers to the criteria set out in IAS 37.10.

Evaluation criteria and leeway

According to IFRS 3, the individual balance sheet items are to be reported at their fair value . This can be determined in various ways. According to Appendix B of IFRS 3, the use of the present value method is always permitted. The possible alternative of market valuation is usually ruled out, as there is very rarely an active market for the intangible assets concerned.

This gives rise to one of the main points of criticism of the purchase price allocation: Since the present value method is based on estimates such as “excess payments”, “discount interest” and “term”, the purchase price allocation can open up extensive accounting leeway. This applies in particular to the (initial) recognition of intangible assets or the non-recognition through allocation to goodwill. While goodwill is no longer since 2006 to write off in installments , the amortization of other intangible assets reduce the reported earnings in the subsequent financial years . The higher the goodwill, the higher the profits, but also the risk of unscheduled value adjustments .

In connection with earn outs , there is additional scope for increased profit disclosure: If these obligations are accounted for at a higher estimated value, i.e. an increased purchase price and goodwill are recognized, then they can be devalued in a later financial year and the associated provisions reversed with a profit. There remains an impairment risk in the increased goodwill.

Purchase price allocation according to the German Commercial Code

The procedure according to HGB is comparable to IFRS, but regulated in less detail: Section 301 HGB only stipulates that the assets, debts and prepaid expenses taken over are to be reported at their current value. However, there is a significant difference in goodwill:

A positive difference is to be capitalized according to HGB and then - in contrast to IFRS - written off proportionally. This reduces the effects of the scope for valuation, since all “intangible added values” are subject to amortization. A negative difference, on the other hand, must be recognized separately as a “difference from capital consolidation” pursuant to Section 301 (3) HGB. In addition, Section 309 (2) of the old version of the German Commercial Code (HGB) (version valid before July 23, 2015) stipulates that it may only be dissolved if either the expected unfavorable development of earnings or expenditure has occurred or if it is certain on the balance sheet date that the “badwill “Corresponds to a realized profit. In the current version of Section 309 (2) of the German Commercial Code (HGB), a difference to be shown on the liabilities side in accordance with Section 301 (3) can be released with an effect on income, provided that such a procedure complies with the principles of Sections 297 and 298 in conjunction with the provisions of the first section.

Valuation of the amortization of intangible assets

As part of the purchase price allocation, assets such as customer bases and order backlogs that cannot be capitalized in normal business can also be identified . As a result, profit-reducing depreciations arise solely through the formal process of group consolidation.

In order to be able to compare companies that have grown internally and externally , it is customary in company valuation to adjust such depreciation, i. H. slam back into pre-tax profits. The EBITA figure is occasionally used for this . Together with the adjustment of further “special and one-off effects”, the term “non-GAAP earnings” (profit not calculated according to generally accepted accounting principles) has become established. Derived from this, one also speaks of “Non-IFRS earnings”.

Such an adjustment of the depreciation from purchase price allocation also neutralizes the above-mentioned valuation latitude. However, it also harbors the risk of overvaluation, as cash outflows due to excessive purchase prices are ignored.

Purchase price allocation as a service

Acquisitions are common and purchase price allocation can affect companies of all sizes and legal forms. Therefore, the purchase price allocation is one of the standard services of consulting companies and banks today. The auditing firms have a dominant position here due to their extensive industry knowledge and extensive know-how.

In addition, services are also offered as part of the subsequent valuation of such corporate transactions, such as the creation of impairment tests required annually for capitalized goodwill.

literature

• Wolfgang Ballwieser , u. a. (Ed.): Handbook IFRS . 7th edition. Wiley-VCH Verlag, Weinheim 2011, ISBN 978-3-527-50587-6 .
• Wolfgang Hefermehl (Ed.): Commercial Code . 55th edition. Deutscher Taschenbuch Verlag, 2014, ISBN 978-3-423-05002-9 .

Individual evidence

1. ↑ see for example the activation of earn outs in the consolidated financial statements of Datagroup AG
2. ↑ Counterexample Xing AG : future payment obligations from a takeover were not allowed to be capitalized, see press release of March 27, 2014
3. ^ Felix Hoehne: Sale of shares in subsidiaries in the IFRS consolidated financial statements . 1st edition. Springer 2009, p. 203.
4. ↑ ^{a b} Thomas Hartmann, Norbert Heinzelmann: Purchase price allocation according to IFRS 3 . ( Memento of the original from May 12, 2014 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF) PricewaterhouseCoopers , January 23, 2014; Retrieved May 11, 2013. 
5. ↑ cf. Devaluation of earn outs in the 2011/12 and 2012/13 annual financial statements of Datagroup AG
6. ↑ § 301 HGB: Capital consolidation on dejure.org, accessed on May 11, 2014
7. ↑ § 309 HGB: Treatment of the difference on dejure.org, accessed on May 11, 2014
8. ↑ Version of Section 309 of the old version of the German Commercial Code (HGB) until July 23, 2015 (amended by Article 1 of July 17, 2015, Federal Law Gazette I, p. 1245). Retrieved February 20, 2019 . 
9. ^ Non-GAAP earnings adjustments . ( Memento of the original from May 12, 2014 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. dvfa.de; accessed on May 11, 2014.