The Purchase Price Allocation IFRS 3 Business Combination Kingdom of Saudi Arabia

Business Market, Finance

Executive Summary

This post discusses Purchase Price Allocation of Intangible assets under IFRS 3 Business Combination and applicable methods can be used to value the Intangible Assets which are widely accepted and used in the valuation practice.

IFRS 3 establishes principles and requirements for how an acquirer in a business combination:

– recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;

– recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and

– determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values; allocates the rest of the cost to goodwill; and recognises any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately. The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.

Portrait View

Purchase Price Allocation

Purchase Price Allocation is mainly comprised of the goodwill accounting where the acquirer allocate the portion of goodwill to certain assets and liabilities to reflect the premium paid over and above the fair value of identifiable net assets. This is demonstrated as follows:


Valuation Approach

The different types of intangibles arise through the PPA which are allocated against the goodwill are customer relations, Brand, non compete, workforce etc.

Valuation Techniques

Multi Purpose Excess Earnings (MEEM)

Multi-Period Excess Earnings Method (MPEEM) is an income-based valuation approach (i.e., it estimates value based on expected future economic earnings attributable to an asset).

For most intangible asset valuations, this valuation approach is a DCF Method. (Note: In very rare instances, a Single-Period Capitalization Method might be used.)

MPEEM is most commonly used to value the primary or most important asset responsible for the income generating ability of a business enterprise or a key segment of a business enterprise.

Typical intangible assets deemed to be “Primary Income Generating Assets” (“PIGA”) (also, “primary assets” or “enabling assets”) and valued using MPEEM include:

  • Customer-related intangible assets,
  • Enabling (“Key”) Technology (generally sold to third-parties) and/or
  • Trade names (extremely strong recognition and impact)