IFRS 3 and Purchase Price Allocation: Beyond Compliance to Strategic Value Creation
The Purchase Price Allocation is the valuation process that breaks down the total consideration (purchase price plus directly attributable costs) into specific, identifiable assets and liabilities at fair value.
This requires more than accounting expertise — it demands market insight, valuation skills, and often industry-specific technical analysis. A well-executed PPA identifies hidden sources of value, especially in intangible assets such as:
- Customer relationships and loyalty programs.
- Trademarks and trade names.
- Proprietary technology and patents.
- Non-contractual customer lists and proprietary know-how.
It also includes tangible assets such as real estate, machinery, or infrastructure, which may require specialized appraisals, and contingent liabilities that must be recognized at fair value if they represent a present obligation.
Why Accuracy Matters: The Goodwill Equation
Once all assets and liabilities are measured at fair value, the residual difference between the purchase price and the net fair value of identifiable assets is recorded as goodwill.
Goodwill often reflects strategic synergies, workforce value, or market positioning that cannot be directly separated or sold. Under IFRS, goodwill is not amortized but is subject to annual impairment testing, making its initial measurement critical.
Case in point:
A multinational acquired a regional competitor in Latin America without engaging a proper PPA. Intangible assets worth millions went unrecognized, inflating goodwill artificially. When a downturn hit, the impairment test resulted in a massive goodwill write-off — eroding investor confidence and cutting the company’s market capitalization by double digits in a single day.
The Risks of a Poorly Executed PPA
Failing to properly perform a PPA under IFRS 3 can lead to:
- Regulatory non-compliance – risking audit qualifications or penalties.
- Misstated financial performance – due to incorrect amortization or impairment charges.
- Investor mistrust – from lack of transparency in asset values.
- Overstated goodwill – inflating balance sheet assets without economic substance.
- Missed tax optimization opportunities – where fair value adjustments impact deferred tax positions.
Beyond Compliance: Strategic Benefits
A robust PPA not only satisfies IFRS requirements but also:
- Supports more accurate post-deal performance metrics.
- Strengthens negotiation positions for future financing or divestitures.
- Provides a detailed roadmap of the acquired business’s value drivers.
Conclusion and Call to Action
Under IFRS 3, the PPA is not a box-ticking exercise. It is a sophisticated valuation process that can materially impact how a transaction is perceived by investors, regulators, and stakeholders. For acquirers, it is a critical step in ensuring that the price paid aligns with the economic value received — and in avoiding costly surprises in the years following the deal.
At SAJOR Consulting, we combine deep IFRS expertise with investment banking-grade valuation skills to deliver PPAs that withstand regulatory scrutiny and enhance strategic decision-making.
If your organization is planning an acquisition — or needs to review a past PPA — contact us to ensure your transaction’s value is fully captured and accurately reflected.
