Purchase price allocation (PPA) explains how acquisition-date consideration is allocated to identifiable assets and liabilities, non-controlling interests and goodwill or bargain purchase. First determine whether the acquired set is a business and whether the transaction is under common control. The cases below are fictional; amounts are in ₹ crore unless indicated.
Apply the acquisition method where required
| Step | What to determine | Evidence or issue |
|---|---|---|
| 1. Identify the acquirer | Identify which entity obtains control under the applicable consolidation standard. | The legal buyer is not always the accounting acquirer. Apply the control indicators rather than a single ownership test. |
| 2. Set the acquisition date | Use the date control is obtained. | Often closing, but review contract terms and facts if legal and control dates differ. |
| 3. Measure identifiable items and NCI | Recognise separately identifiable assets and liabilities, generally at acquisition-date fair value, subject to stated exceptions. | Apply the relevant rules for employee benefits, taxes, contingent liabilities and other exceptions. For qualifying present ownership interests, select fair value or proportionate net assets as permitted for that combination. |
| 4. Compute goodwill or bargain purchase | Add consideration, measured NCI and the acquisition-date fair value of any previously held interest; subtract recognised net identifiable assets. | Reassess measurements before recognising a bargain; the presentation differs under IFRS 3 and Ind AS 103. |
Identify and value intangible assets
Under Ind AS 103 paragraph B31, an intangible is identifiable if it arises from contractual or other legal rights, or is separable. A contractual right can be identifiable even if not transferable. Do not recognise an assembled workforce or expected synergies as separate assets merely because they help explain the purchase price.
| Asset | Possible approach | Key assumptions to document |
|---|---|---|
| Customer or doctor relationships | Multi-period excess earnings method | Attributable cash flows, attrition, margins and contributory asset charges. Do not double count cash flows assigned to other assets. |
| Brand or trademark | Relief from royalty | Support market royalty rates, revenue forecasts, taxes, discount rate and useful life. |
| Technology or software | Replacement cost or an income approach where appropriate | Allow for obsolescence and test whether cost reflects the benefits or utility of the asset. |
| Non-compete right | With-and-without cash flow method | Compare supportable scenarios and check enforceability, contractual term and shorter economic life where relevant. |
Choose a method consistent with Ind AS 113 and market-participant assumptions. Finite-lived intangibles are amortised over useful life using the supported pattern, or straight-line if that pattern cannot be determined reliably. Do not impose a generic life or royalty rate. Indefinite-lived intangibles are not amortised and are tested for impairment as required.
Separate consideration, earn-outs and taxes
Recognise the fair value of consideration transferred at acquisition, including cash, issued equity and qualifying contingent consideration. Consider the actual terms of escrows and deferred payments; select a market-consistent discount rate rather than automatically using the acquirer’s borrowing rate. A probability-weighted model can be suitable for a simple earn-out, while other designs may require a different valuation method. If payments to sellers depend on continuing employment, assess whether they compensate future service and are separate from the purchase.
Subsequent changes to liability-classified contingent consideration generally go to profit or loss unless they qualify as measurement period adjustments. Equity-classified contingent consideration is not remeasured. Identify which facts existed at acquisition and distinguish them from later performance.
Under Ind AS 12, compare acquisition-date carrying amounts with actual tax bases item by item. Recognised deferred tax affects goodwill or bargain purchase. Do not equate all fair value step-ups with taxable temporary differences or recognise a DTL on the initial recognition of goodwill. A share purchase and asset purchase can have different tax outcomes. Where 25.168% is used here, it is an assumed applicable rate (22% × 1.10 × 1.04), not a rate for every company or transaction.
Seven worked examples
1. Hospital acquisition: intangibles, tax and goodwill
An acquirer buys 100% of a hospital business for ₹120 crore cash on 1 April 2023. Historical net assets are ₹30 crore. Assume the ₹10 crore tangible step-up relates solely to depreciable components and the tax bases remain at the historical amounts shown; the newly identified intangibles have nil tax bases. The ₹18 crore doctor relationships value and ₹4 crore non-compete value are stipulated valuation inputs.
Brand illustration: start with ₹40 crore of year-one revenue, grow it 10% a year for 15 years, apply a 3% royalty, deduct tax at 25.168% and discount each year-end amount at 14%. With no terminal value or tax amortisation benefit in this model, the sum is ₹9.312 crore. The 3% royalty and other assumptions are illustrative, not industry benchmarks.
| Item | Historical book and assumed tax base | Acquisition amount | Taxable temporary difference | DTL at 25.168% |
|---|---|---|---|---|
| Depreciable building and equipment | 38.000 | 48.000 | 10.000 | 2.517 |
| Working capital | 6.000 | 6.000 | 0.000 | 0.000 |
| Borrowings | -14.000 | -14.000 | 0.000 | 0.000 |
| Brand | 0.000 | 9.312 | 9.312 | 2.344 |
| Doctor relationships | 0.000 | 18.000 | 18.000 | 4.530 |
| Non-compete right | 0.000 | 4.000 | 4.000 | 1.007 |
| Total | 30.000 | 71.312 | 41.312 | 10.397 |
Net identifiable assets after DTL are ₹60.914 crore and goodwill is ₹59.086 crore. Values use unrounded calculations and displayed rows may not sum exactly. With straight-line lives of 15 years for the brand, ten years for relationships, three for the covenant and 20 for the depreciable step-up, the annual additional pre-tax charge in the first full year is ₹4.254 crore. On the assumed reversal pattern, DTL release is ₹1.071 crore and the net earnings charge is ₹3.183 crore. Goodwill is not amortised under Ind AS.
2. SaaS acquisition: contingent payment
The acquirer pays ₹60 crore at closing and will pay ₹25 crore in two years if annual recurring revenue exceeds ₹30 crore. Assume the cash earn-out is a liability, market-participant payout probability is 60% at acquisition, and the rate consistent with the probability-adjusted cash flow is 12%. Initial fair value is ₹11.958 crore (25 × 60% ÷ 1.12²), making initial consideration ₹71.958 crore.
After one year, assume probability rises to 90% due to post-acquisition performance, with one year to payment and the same rate. Fair value is ₹20.089 crore, an increase of ₹8.131 crore. On these facts recognise the increase in profit or loss; do not add it to goodwill. The example does not assign it to a specific operating line item.
3. Distressed business: bargain purchase
Assume the acquired rolling mill qualifies as a business, not simply an asset group. Consideration is ₹80 crore and the reassessed identifiable net assets including relevant obligations and deferred tax are ₹115 crore. The difference is ₹35 crore. Recheck recognised assets, liabilities, consideration, NCI and any previously held interest as applicable before concluding.
Under Ind AS 103, when clear evidence supports the underlying bargain, recognise the gain in OCI and accumulate it in capital reserve. If clear evidence is absent but the difference remains after reassessment, recognise it directly in equity as capital reserve under paragraph 36A. Distress alone is not proof. Under IFRS 3, the reassessed bargain purchase gain is recognised in profit or loss.
4. Brand valuation: measurement period adjustment
A business is acquired on 1 September 2023. Before the measurement period ends, the acquirer obtains information in March 2024 about conditions that existed at acquisition, raising a provisional brand amount from ₹8 crore to ₹14 crore. With no change in tax base and an assumed 25.168% reversal rate, debit the brand by ₹6.000 crore, credit DTL by ₹1.510 crore and reduce goodwill by ₹4.490 crore. Reflect the change as if measured at acquisition, including the effect on relevant amortisation, tax and any comparative information.
5. Carve-out: employee benefit obligations
Assume a division purchased for ₹210 crore includes 120 transferred employees. Establish which obligations and qualifying plan assets actually transfer. With ₹21.40 crore of assumed defined benefit obligation and ₹16.60 crore of transferred qualifying plan assets under Ind AS 19, recognise a ₹4.80 crore net liability in the combination. If assets remain with the seller, do not mechanically assign an actuarial share of them to the buyer.
6. Acquisition and litigation settlement
An acquirer pays ₹50 crore to buy a business in a transaction that also settles a separate pre-existing non-contractual litigation claim for ₹6 crore. Assume the settlement component’s fair value is ₹4.20 crore and the acquirer has no previous related balance. Recognise that component separately as a settlement expense, leaving ₹45.80 crore as business consideration. Review paragraph B52 separately for contractual relationships and adjust for any amount already recognised.
7. Common control: pooling instead of a new PPA
Two entities are ultimately controlled by the same party before and after the combination, and control is not transitory. Under Appendix C of Ind AS 103, use pooling: recognise existing carrying amounts after harmonising accounting policies, preserve reserve identities and restate prior information as required. Do not create new goodwill by revaluing the transfer. IFRS 3 excludes combinations under common control from its scope.
Assume the transferor has assets of ₹25 crore, liabilities of ₹10 crore, share capital of ₹10 crore and other reserves of ₹5 crore. The transferee records ₹7 crore of share capital issued and pays ₹1 crore in cash. The ₹2 crore difference is a credit to a separate capital reserve, based on transferor share capital less the share capital and cash consideration. The existing ₹5 crore reserve retains its identity. The journal balances at ₹25 crore on each side. This is not a rule for tax basis.
Review file and sign-off
- Keep the agreement, consideration and employment terms, acquisition-date memo, control analysis and scope conclusion.
- Document the assets and liabilities identified, valuation methods, market inputs and tax bases. Reconcile the assumptions between methods and avoid overlapping cash flows.
- Keep the goodwill and deferred tax bridge, measurement period log, asset useful lives, and an acquisition-date to closing roll-forward. Test goodwill and indefinite-lived intangibles under Ind AS 36.
Frequently asked questions
1. Is acquisition goodwill amortised under Ind AS?
No. Allocate it to the relevant cash-generating units or groups and test at least annually and when indicators exist. Finite-lived identifiable intangibles follow separate amortisation rules.
2. When can provisional values change?
Adjust provisional amounts retrospectively for new evidence about acquisition-date facts during the measurement period. It ends when the necessary information is obtained or no further information can be obtained and never exceeds one year. After that, revise acquisition accounting only to correct an error under Ind AS 8; account for new events under the relevant standards.
3. Does the consolidated step-up create an income-tax deduction?
It does not, by itself, change the target company’s tax base. Check the transaction structure and tax law for the relevant period, and assess deferred tax using the actual tax base and expected recovery.
4. Is every asset purchase a business combination?
No. Assess the acquired input and substantive process under the business definition and consider the optional concentration test where applicable. An asset group that is not a business does not give rise to goodwill. Identify the items and allocate the group cost on the applicable relative fair value basis.
5. Are advisory fees part of goodwill?
Acquisition-related costs are generally expensed as incurred and services are received. Costs of issuing debt or equity are accounted for under the applicable financial instrument standards; they are not additional consideration for the business.
6. What can PPA software help with?
A model can reconcile values, trace deferred tax and generate amortisation schedules. Verify the source inputs, tax bases and journal entries. The resulting schedules do not replace judgement or valuation evidence.
Sources
- ICAI compendium: Ind AS 103, including Appendix C
- IFRS Foundation: IFRS 3, including paragraphs 2 and 34–36
- ICAI compendium: Ind AS 113, fair value measurement
- ICAI compendium: Ind AS 38, intangibles and amortisation
- ICAI compendium: Ind AS 12, income taxes
- ICAI compendium: Ind AS 19, employee benefits
- ICAI compendium: Ind AS 36, impairment
- Income Tax Department: domestic company rate components