Part I: What’s the Value in a PPA?
A Purchase Price Accounting (PPA) is the process of allocating the consideration paid in a business acquisition (“Business Combination”) to the assets acquired and liabilities assumed (including intangible assets). It provides a day one balance sheet for the acquirer, setting out the individual assets/liabilities that have been acquired from the target company. The PPA process analyses individual assets and business processes in a level of detail that is often not explored. Fundamental to this analysis is a clear understanding of the target’s core operational drivers.
There are many elements involved in a successful transaction, but often consideration of the accounting and tax implications are pushed to the side. When most companies make an acquisition they examine the impact of the acquisition on future earnings, earnings per share, and potential debt covenants. To do so adequately requires consideration as to which intangible assets will be recognised on acquisition, and then subsequently amortised. Few companies explicitly consider the acquisition accounting implications. Additionally, limited focus is given by companies to explicitly consider the potential impact of impairment of goodwill following an acquisition. A further potential benefit of a structured PPA is understanding allocation of value to tax depreciable assets.
Throughout this series, we highlight the risk of failing to adequately consider the acquisition accounting and tax implications of a deal, ideally both prior to; and following successful completion of a transaction.
Acquisition Accounting is required to be applied to any purchase of a business falling under the definition of a ‘Business Combination’. Acquisition Accounting is typically complex and requires considerable skills, experience and effort to ensure robust and satisfactory outcomes. Further, the requirements of three key Accounting Standards need to be considered together since they are interdependent: AASB 3: Business Combinations; AASB 136: Impairment of Assets; and AASB 138: Intangible Assets. There are similar requirements for tax purposes, when an acquisition falls under the tax consolidation regime.
There is a process to follow which will ensure that all key requirements of accounting for an acquisition are met. The steps involved in completing a PPA include:
- Determine if the transaction falls under the definition of a Business Combination
- Identify the acquirer
- Confirm the acquisition date
- Confirm the cost of the acquisition
- Identify all assets (both tangible and intangible) acquired and liabilities assumed (including contingent liabilities)
- Determine the fair market values of all assets and liabilities identified including Identifiable Intangible Assets and any tax amortisation benefits. Perform the PPA and apply appropriate cross-checks
- Consider Tax Impacts and confirm deferred tax balances
- Determine goodwill or the discount
The Crowe Horwath team is experienced in assisting clients across all the areas of AASB 3 including:
- Considering the PPA implications prior to transaction completion (indicative or preliminary PPA work)
- Identifying intangible assets acquired and providing a fair market value and useful economic life for each of these assets
- Performing the PPA and providing appropriate rationale for any goodwill arising
- Applying appropriate cross-checks
- Providing amortisation schedules, assisting you to understand the impact on earnings
- Providing a reasoned and robust framework to support the carrying value of goodwill, intangible assets and other assets in the context of changing economic and business conditions
- Understanding the specific requirements of the accounting Standards and tax implications
- Dealing with the issues and questions that may be raised by your external auditors and ASIC
- Providing you with access to specialist modelling, tax and technical accounting teams to assist with the PPA.
In Part II of this series we will consider each of the above steps in detail. Look out for the next instalment.
At Crowe Horwath we are here to assist you achieve the robust, reasoned and defensible PPA outcomes. Please contact us if you would like further information.
Partner – Melbourne
T: +61 3 9258 6701
Partner – Sydney
T: +61 2 9619 1783