3 minute read 16 Mar 2023
PPA study

EY purchase price allocation study: can recognizing intangibles add value?

EY India
By EY India

Multidisciplinary professional services organization

3 minute read 16 Mar 2023
Related topics Strategy and Transactions
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  • A study of purchase price allocation in India - 2023

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Almost a third of business consideration is allocated to intangible assets and goodwill.

In brief

  • Ind AS 103 Business Combinations (Ind AS 103) transforms the way companies plan and execute their acquisition strategies.
  • Purchase Price Allocation (PPA) is relevant from an income-tax perspective; tax treatment for different intangibles and goodwill are different and have to be measured at fair value.

Understanding the implications of Ind AS 103 is important since they not only affect the balance sheet of a company but may also have tax implications. Post COVID-19, the number of Mergers & Acquisitions increased during the year ended 31 March 2022, particularly in the backdrop of declined M&A activity during the previous year which was impacted due to the pandemic. Ind AS 103 impacts the way companies plan and execute their acquisition strategies. The standards apply to most business combinations, including amalgamations and acquisitions. The change in accounting for business combinations calls for assets/ liabilities (including intangible assets and contingent liabilities which did not exist on the balance sheet of target entities/ businesses) acquired in a deal to be measured at fair value by applying appropriate valuation methods and residual value allocated to goodwill/ capital reserve.

EY’s valuation, modelling and economics services department conducted a Purchase Price Allocation (PPA) study of business combination accounting for transactions that were disclosed in annual reports of top 500+ listed companies in India (covering over 500+ transactions) by market capitalization since implementation of Ind AS till 31 March 2022. The PPA study presents the results of assets (primarily intangible assets) that are typically recognized and reported by a company during an acquisition. However, the results of this study cannot be viewed in isolation. 

Key findings of our fourth PPA study include

  • 29% of the enterprise value of acquired companies was allocated to identified intangible assets and 34% was attributable to goodwill, with the allocation varying considerably from industry to industry. The allocation to goodwill in India is largely in line with the proportion allocated to global deals (e.g., in the US).
  • In sectors like telecommunications, life sciences, retail and consumer products, a relatively higher proportion of deal value is allocated to intangible assets. This is reflected by the underlying products, brands, intellectual property, license and rights and customer relationships.
  • Capital-intensive sectors, such as real estate and hospitality, energy, metals and building materials, allocate more than two-thirds of their enterprise value to tangible assets
  • Marketing related intangibles were the key acquisition driver in the customer products, life sciences and retail sector. Customer-related intangibles seem to be the acquisition driver in IT/ITeS sector.

The Purchase Price Allocation study also revealed some interesting results, which are:

  • Allocation of value to the dealer network is among the lowest, implying that it is not a key driver for acquisitions, though considered a critical element for many industries.
  • Generally, a non-compete agreement is a part of most acquisitions as a safeguard to the buyer. However, allocation of value to non-compete agreement is on the lower side - possibly indicating either a shorter life or that the probability/ impact of competition is perceived to be minimal.
  • Depending on the transaction structure, Purchase Price Allocation (PPA) will also have relevance from an income-tax perspective, as tax treatment for different intangibles and goodwill would be different and have to be measured at fair value applying appropriate valuation methods and residual value allocated to goodwill/capital reserve.

How EY can help

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EY purchase price allocation study results

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Summary

Ind AS has consistently emphasized the importance of precise business combination accounting. While valuation guidelines may be prescribed in detail, assumptions and workings are still highly subjective in nature. An independent, reasonable test is very important. A thorough PPA study will help in keeping a check with other transactions in a similar space. This PPA study will help the management, auditors, tax officers and other advisors to assess the reasonableness of an individual PPA and predict the M&A impact on amortization expense.

About this article

EY India
By EY India

Multidisciplinary professional services organization

Related topics Strategy and Transactions
Upvote