Purchase Price Allocation

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Purchase Price Allocation

Purchase price allocation is a key step in the accounting treatment of business acquisitions. It determines how the purchase price is allocated to identifiable assets, liabilities, and goodwill—and thus influences depreciation, earnings metrics, and the balance sheet for years to come.

A well-founded purchase price allocation provides transparency regarding the economic substance of a transaction, reveals the impact on earnings at an early stage, and ensures that accounting effects are presented in a traceable and audit-ready manner.

Contact us to set up your purchase price allocation early on and in a manner that is audit-ready.

Why WTS

We view purchase price allocation as an integral part of the transaction and valuation process. Our starting point is a deep understanding of the transaction structure, the underlying business valuation, and the relevant accounting requirements. Our particular strength lies in combining valuation methodology with accounting expertise. This enables us to develop purchase price allocations that are economically consistent and financially sound, and that meet both management and audit requirements.

Our Purchase Price Allocation Services

Purchase Price Allocation (Post-Closing)

We prepare audit-ready purchase price allocations for the financial reporting of business acquisitions in accordance with the German Commercial Code (HGB), IFRS (particularly IFRS 3 and IFRS 13), and U.S. GAAP. In doing so, we identify and value all relevant assets, liabilities, and contingent liabilities using fair value principles and derive goodwill in a manner consistent with economic principles. The purchase price allocation is based on the underlying business valuation as well as the final transaction parameters. Additionally, findings from a financial due diligence process we have supported can be incorporated into the fair value measurements to consistently account for sustainable earnings metrics, cash flows, and net debt.

Our Focus Areas:

Conducting purchase price allocations in accordance with HGB, IFRS, and US-GAAP
Identification of hidden reserves and liabilities
Valuation of tangible assets at market values
Identification and valuation of intangible assets (e.g., customer relationships, brands, technology)
Valuation of liabilities and contingent liabilities
Calculation and documentation of goodwill
Preparation of an audit-ready PPA report

Pre-Deal Purchase Price Allocation

We incorporate purchase price allocation into the transaction process early on to ensure transparency regarding balance sheet and earnings impacts at an early stage. The pre-deal PPA is based on the business plan, indicative purchase price assumptions, and a preliminary business valuation and—if desired—is carried out in conjunction with our M&A Advisory services and a financial due diligence. This provides you with a reliable estimate of the effects on goodwill, amortization, EBIT, and EPS even before signing or closing.

Our Focus Areas:

Early valuation of significant intangible assets and goodwill based on the business plan
Estimation of future amortization profiles and impacts on earnings
Identification of balance sheet value drivers and areas for optimization
Support with structuring and negotiation decisions
Preparation for subsequent finalization after closing or business valuation

Valuation Support for Intangible Assets

We value intangible assets using recognized valuation methods and in accordance with IDW S 5 and IFRS 13, and we document valuation assumptions in a transparent and auditable manner.

Our Focus Areas:

Valuation of customer relationships, brands, technology, and other intangible assets
Development and application of appropriate DCF models
Documentation of key assumptions and parameters
Sensitivity analyses of key value drivers

Ongoing Accounting Advisory Services & Special Topics

We assist you with related accounting issues concerning initial consolidation, purchase price allocation, and follow-up matters, as well as with the preparation of subsequent goodwill impairment tests in accordance with IAS 36.

Our Focus Areas:

Advice on initial consolidation and related matters
Valuation of earn-outs, put/call structures, and complex options
Distinction between purchase price and management compensation
Advice on goodwill impairment risks and preparation for subsequent impairment tests
Coordination with auditors and support throughout the audit process

Main Contact

Dr. Rainer Doll

Partner Advisory

Munich

+49 89 28646 2716

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Main Contact

Christian Hörmann

Partner Advisory

Munich

+49 89 28646 1886

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Main Contact

Thomas Kuehl

Partner Advisory

Deal Advisor

Frankfurt

+49 (0) 151 55977264

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Our Approach to Purchase Price Allocation

The focus of our approach is on the consistent derivation of identified assets, liabilities, and goodwill, as well as the transparent presentation of the resulting effects on the balance sheet.

Step 1

Kick-off & Scoping

Together, we define the scope, valuation standard, PPA level, and level of detail down to the company code. We also coordinate data requirements, the timeline, and communication with the auditor.

Step 2

Identification

We identify relevant tangible and intangible assets, liabilities, and contingent liabilities, as well as other necessary adjustments. This process is based on discussions with management, contract analyses, and available company information.

Step 3

Valuation

We measure the identified assets and liabilities in accordance with recognized fair value principles. For intangible assets, we use tried-and-true discounted cash flow models based on the business plan.

Step 4

Sensitivities and Consequences

We analyze the impact of PPAs on key earnings and performance metrics and identify sensitivities of key value drivers. We also address potential goodwill impairment risks.

Step 5

Report and Implementation

We document the results in an audit-ready report, prepare journal entries upon request, and provide support with push-down accounting and coordination with the auditor.

Step 6

Ongoing coordination with the auditor

Throughout the entire process, we coordinate assumptions, models, and results closely with the auditor to ensure a smooth audit.

Frequently Asked Questions About Purchase Price Allocation

What is a Purchase Price Allocation (PPA)?

A purchase price allocation (PPA) is the allocation of the purchase price in the context of a business acquisition. It involves allocating the purchase price paid to the acquired assets, liabilities, and contingent liabilities. The purpose of the purchase price allocation is to accurately reflect the business combination in the financial statements and to identify hidden reserves and intangible assets such as brands, customer relationships, or technologies.

What does purchase price allocation mean under IFRS 3?

Purchase price allocation under IFRS 3 describes the accounting allocation of the purchase price in a business combination. Under IFRS 3, the acquiree’s identifiable assets and liabilities must be recognized at fair value. Any remaining difference is generally recognized as goodwill.

How does purchase price allocation work under IFRS 3?

Purchase price allocation under IFRS 3 is carried out in several steps: First, the purchase price or the consideration transferred is determined. Next, the acquired assets and assumed liabilities are identified and measured. The purchase price is then allocated to these items. The remaining amount represents goodwill or, in rare cases, a gain from a bargain purchase.

Which assets are valued during purchase price allocation?

In a purchase price allocation, both tangible and intangible assets are valued. These include, for example, land, buildings, machinery, inventory, trademarks, patents, software, customer relationships, order backlogs, and technologies. Intangible assets, in particular, play an important role in purchase price allocation, as they were often not fully reflected on the balance sheet prior to the acquisition.

Why is purchase price allocation important in business mergers?

Purchase price allocation is important because it forms the basis for the accounting treatment of a business combination under IFRS 3. Among other things, it affects the amount of goodwill, future amortization, impairment tests, and transparency in the consolidated financial statements. Careful purchase price allocation ensures that investors, shareholders, and other stakeholders can understand which assets were acquired through the business merger.

Further topics you could be interested in

Business valuation

Impairment test according to HGB and IFRS

Due Diligence

Financial Modeling

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