By Bill Anderson, FCCA, Chief Executive Officer, Assetica — 2026-08-04
A purchase price allocation splits what you paid for an acquisition across the fair value of every asset and liability you actually acquired, tangible and intangible, with the balance booked as goodwill. Get it wrong and you carry an inflated, undocumented goodwill figure that audit and impairment testing will eventually challenge. The step-by-step IFRS 3 process, worked examples, and how it is applied across the UAE, UK, Europe, Saudi Arabia and Australia.
Purchase price allocation (PPA) is the process required under IFRS 3 Business Combinations of assigning the total consideration paid in an acquisition across the fair value of every identifiable asset acquired and liability assumed, tangible and intangible, with the residual recorded as goodwill. It is governed internationally by IFRS 3, and by equivalent standards including FRS 102 Section 19 in the UK and AASB 3 in Australia.
A PPA sets the amortisation charges on identified intangibles for years to come, determines the size of the goodwill balance carried at open-ended impairment risk under IAS 36, triggers deferred tax recognition on fair value uplifts under IAS 12, and is one of the highest-risk areas auditors test in an acquisition-year audit. A rushed allocation that dumps the whole premium into goodwill is a near-guaranteed source of audit queries and future write-down risk.
A PPA is required whenever a transaction meets the IFRS 3 definition of a business combination, meaning the acquirer obtains control of a business, whether through a share acquisition, a merger, or an asset acquisition that includes enough of a business's inputs and processes to itself be treated as a business. A straightforward single-asset purchase or a minority stake that does not confer control falls outside its scope.
A defensible PPA identifies the acquirer and acquisition date, determines total consideration transferred including contingent elements at fair value, identifies every acquired asset and assumed liability including intangibles the target never recognised on its own books, measures each item at fair value using the method appropriate to the asset class, recognises deferred tax on any fair value uplift, and calculates goodwill as the residual. IFRS 3 allows up to twelve months from the acquisition date, the measurement period, to finalise these figures.
Customer relationships are typically valued using the multi-period excess earnings method, brand names and technology using the relief-from-royalty method, non-compete agreements using the with-and-without method, and order backlog using discounted cash flow on contracted revenue. Each intangible should be discounted at a rate reflecting its own risk, usually higher than the whole-company weighted average cost of capital, since a single asset is riskier in isolation than the diversified cash flows of the business.
Goodwill is what remains after every identifiable asset and liability has been fairly valued: total consideration, plus the fair value of any non-controlling interest, minus the net fair value of identifiable assets and liabilities including the deferred tax impact of any uplift. It is not a default bucket for unanalysed value, and a PPA that separates intangibles properly produces a materially smaller, better-supported goodwill figure than one that does not.
UAE companies apply IFRS 3 directly, and PPA outcomes now also feed the tax base used for UAE corporate tax and group restructuring relief. UK companies apply IFRS 3 or FRS 102 Section 19, which allows goodwill amortisation rather than annual impairment testing. EU groups apply IFRS 3 as endorsed by the EU, though smaller entities may follow local GAAP. Saudi Arabia has required IFRS via SOCPA since 2017, with Taqeem licensing valuers. Australia applies AASB 3, which mirrors IFRS 3, alongside ATO scrutiny of the allocation for capital allowances purposes.
The most frequent errors are lumping the entire premium into goodwill instead of separately identifying intangibles, applying the whole-company discount rate to individual assets, forgetting deferred tax on fair value uplifts, missing the twelve-month measurement period deadline, and reusing the pre-deal valuation model unchanged rather than adapting the methodology to IFRS 3's asset-by-asset requirement.
What is purchase price allocation in simple terms?
Purchase price allocation is the process of splitting the total price paid for an acquired company across the fair value of everything it actually owned, buildings, equipment, customer relationships, technology, and liabilities it owed, with whatever is left over recorded as goodwill.
Is a purchase price allocation required for every acquisition?
It is required under IFRS 3, FRS 102, AASB 3 and equivalent standards whenever the transaction meets the definition of a business combination, meaning the acquirer obtains control of a business. Straightforward purchases of a single asset, or the acquisition of a minority stake that does not confer control, are outside its scope.
Who performs a purchase price allocation?
It is typically prepared by an independent valuation specialist working alongside the acquirer's finance team and statutory auditor, since the assumptions and methodology need to withstand independent audit challenge.
How long does a purchase price allocation take?
A typical PPA for a mid-market acquisition takes six to eight weeks from data collection to a draft report ready for audit review, with IFRS 3 allowing up to twelve months from the acquisition date for the figures to be finalised as new information comes to light.
What happens if goodwill is calculated incorrectly?
An overstated or understated goodwill figure misstates future amortisation charges on intangibles, distorts the annual impairment test under IAS 36, and is one of the most common triggers for an audit qualification or a subsequent restatement.
Can goodwill be negative?
Yes, in a bargain purchase, where the fair value of identifiable net assets exceeds the consideration paid. Rather than being carried as negative goodwill, IFRS 3 requires this gain to be recognised immediately in profit or loss, after the acquirer has reassessed the allocation.
What is the difference between goodwill and identifiable intangible assets?
Identifiable intangible assets, such as customer relationships or a brand name, can be separately valued and are amortised over their useful lives. Goodwill is the unallocated residual, and it is tested annually for impairment rather than amortised.
Does purchase price allocation affect corporate tax?
Yes, in most jurisdictions. In the UAE, fair value uplifts identified in the PPA feed into the tax base used for UAE corporate tax purposes and group relief calculations. In the UK and Australia, the allocation affects the capital allowances and depreciation positions available on the assets acquired.
What discount rate should be used to value intangible assets in a PPA?
Each intangible asset should be discounted at a rate that reflects its own specific risk, which is usually higher than the weighted average cost of capital used to value the acquired business as a whole.
What is the twelve-month measurement period?
IFRS 3 allows an acquirer up to twelve months from the acquisition date to finalise provisional PPA figures as new information about facts and circumstances existing at the acquisition date comes to light. Adjustments within that window are applied retrospectively.
Does a share deal require the same PPA as an asset deal?
If a share deal results in the acquirer obtaining control of a business, it triggers the same IFRS 3 purchase price allocation requirement as an asset deal that is judged to constitute a business. The structure chosen for tax and legal reasons does not change the accounting requirement once control has passed.
Why do auditors focus so heavily on purchase price allocation?
Because it involves significant management judgement and estimation, most notably in the choice of valuation method, discount rate and useful life for intangible assets, all of which are areas auditing standards specifically flag as higher risk of material misstatement.