IFRS 3 PPA: Step-by-Step Purchase Price Allocation with Worked Example

The Purchase Price Allocation (PPA) is the forensic accounting analysis that happens immediately after an acquisition closes. It determines which assets were acquired, their fair values, the hidden liabilities assumed, and the goodwill figure. This guide walks through the PPA process, the audit challenges, and a detailed worked example.

What is a PPA?

A PPA is a detailed schedule reconciling what you paid (consideration) to what you got (identifiable assets and liabilities at fair value). The difference is goodwill.

PPA timing: Must be completed and finalized within 12 months of the acquisition date. Provisional goodwill can be used initially, but must be finalized by the end of Year 1.

PPA Step 1: Measure Consideration

Add up everything transferred to acquire the target:

• Cash paid at closing
• Debt assumed (measured at fair value, often PV of future payments)
• Shares issued (fair value at acquisition date, not offer price)
• Contingent consideration (probability-weighted estimate)
• Options/warrants issued

PPA Step 2: List Identifiable Assets (Tangible & Intangible)

Tangible Assets

• Cash and equivalents (fair value = amount)
• Receivables (fair value = PV of expected cash collections, not gross amount)
• Inventory (fair value = replacement cost or NRV, whichever is lower)
• PP&E (fair value = market price or cost to replace)
• Investment property (fair value = market value)

Intangible Assets (Separately Identifiable)

• Customer relationships/lists (valuation specialist required)
• Trade names/brands (customer willingness to pay premium)
• Patents/trademarks (remaining legal life)
• Technology/software (discounted cash flows from future sales)
• Non-compete agreements (lost revenue if competitor entered)
• Leasehold interests (below/above-market lease terms)

PPA Step 3: List Liabilities Assumed

• Accounts payable (fair value = amount due)
• Debt (fair value = PV of future principal + interest; may differ from carrying amount)
• Deferred revenue (liability if customer hasn't received goods/services)
• Warranties (expected cost to satisfy)
• Environmental/legal claims (probable outflows)
• Employee obligations (pension, severance if plan exists)

PPA Step 4: Calculate Deferred Tax

Fair value adjustments create temporary differences between book and tax. Calculate deferred tax on each adjustment:

• Fair value increase in PP&E: deferred tax liability
• Fair value increase in intangible assets: deferred tax liability
• Liability adjustment (warranty provision created): deferred tax asset

Deferred Tax = (Fair Value Adjustment −’ Carrying Amount) × Tax Rate

PPA Step 5: Calculate Goodwill

Goodwill = Consideration −’ (Identifiable Assets −’ Liabilities, net of deferred tax)

Worked Example: Engineering Services Acquisition

Deal Overview

Buyer: GlobalTech Consulting
Target: EngineerPro Inc.
Close Date: 1 October 2025
Enterprise Value: £150m

Consideration Paid

Fair Value of Identifiable Assets & Liabilities

Goodwill Calculation

Goodwill = £150m −’ £90.77m = £59.23m

Goodwill Sanity Check

Goodwill as % of consideration: £59.23m / £150m = 39.5% ✓ (Reasonable; typically 30— 50% is acceptable)

PPA Schedule (Summary)

PPA Audit Red Flags

Red Flag 1: Incomplete Intangible Asset Identification

Finding: PPA identifies only £10m of intangibles, but auditor research suggests customer relationships are worth £25m+.

Impact: Goodwill is overstated; audit adjustment required.

Red Flag 2: Overstated Fair Values

Finding: PP&E revalued upward £50m with minimal supporting appraisals.

Auditor action: Engage independent valuation specialist; adjust down if unsupported.

Red Flag 3: Deferred Tax Not Calculated

Finding: Fair value adjustments totaling £60m created, but no deferred tax recorded (assuming 20% rate, £12m liability needed).

Auditor action: Record deferred tax liability; adjust goodwill down.

Real-Life Case Study: Splitting the Price in a PPA