Ultimate Guide to PPA Valuation (Ind AS)

When two companies come together in a merger or acquisition, there’s always a headline number: “Company A acquires Company B for ₹1,000 crore.”

But here’s the catch — that number alone doesn’t tell the full story.

What exactly did Company A pay for? Was it the factories and buildings? Was it the well-known brand? The loyal customer base? Or was it future potential that can’t even be touched or seen?

This is where Purchase Price Allocation (PPA) steps in.

PPA is more than an accounting requirement under Ind AS 103 – Business Combinations. It’s the process of translating the deal rationale into numbers that can sit in the financial statements. It helps tell the story of why the acquirer paid what it did, in a structured, transparent way.

Why PPA Valuation Matters

PPA is not just a compliance exercise; it serves multiple purposes:

• Transparency for stakeholders: Investors get a clear picture of what assets and intangibles form part of the acquisition.
• Regulatory compliance: Ensures the acquirer’s financial statements are in line with Ind AS.
• Future performance tracking: Separating goodwill and intangibles allows monitoring of impairments and understanding whether the deal truly created value.
• Tax planning: Helps assess potential amortization and depreciation benefits of intangibles.

In short, PPA builds the bridge between the economics of a deal and how it is presented in financial statements.

Standards Behind PPA Valuation

1. Ind AS 103 – Business Combinations

This is the foundation of PPA. It requires that the acquirer must:

• Recognize all assets acquired and liabilities assumed at their acquisition-date fair values.
• Separately identify intangible assets that meet recognition criteria (e.g., brands, customer contracts, technology).
• Recognize goodwill as the balancing figure when purchase consideration exceeds the fair value of net assets.

2. Ind AS 113 – Fair Value Measurement

Ind AS 103 tells us what to do, but Ind AS 113 tells us how to do it. It provides the framework for fair value, emphasizing:

• Market participant assumptions – valuation must reflect what others in the market would pay.
• Valuation approaches – income, market, or cost approaches for estimating fair value.
• Fair value hierarchy – prioritizing observable inputs (market data) over unobservable ones (management assumptions).

3. Ind AS 38 – Intangible Assets

This standard sets out the recognition and measurement rules for intangibles identified in a PPA. For example, an intangible must be separable or arise from contractual/legal rights. It also guides on amortization and impairment testing.

4. Ind AS 36 – Impairment of Assets

Once PPA is done, the story doesn’t end. Goodwill and certain intangible assets are tested annually for impairment under Ind AS 36. This ensures that the values recognized at the time of acquisition still reflect economic reality in future years.

Together, these standards ensure that the PPA valuation is not arbitrary but based on consistent principles.

Steps to Complete a PPA Valuation

A PPA valuation is a structured process. Here’s how it typically unfolds:

Step 1: Understand the Transaction

The starting point is to understand the nature of the deal. Who is the acquirer? What was the rationale behind the transaction? Was it for market expansion, technology, or customer base? This context shapes the valuation assumptions.

Step 2: Determine the Purchase Consideration

The next step is to establish the total purchase price. This is not just the cash paid – it may include equity shares issued, deferred payments, contingent considerations (earnouts), or assumed liabilities. All these must be measured at fair value.

Step 3: Identify the Acquired Assets and Liabilities

This involves a detailed examination of the target company’s balance sheet. Tangible assets like property, plant, and equipment are straightforward, but many hidden items come into play, such as:

• Off-balance sheet obligations.
• Customer or supplier contracts.
• Intangible assets that were not recorded earlier but now meet recognition criteria.

Step 4: Measure the Fair Value of Assets and Liabilities
This is the core of the valuation exercise. Each identified asset and liability must be measured at fair value as of the acquisition date. For example:

• Tangible assets – typically valued using market or cost approach.
• Financial assets/liabilities – valued using observable market inputs.
• Intangible assets – valued using specialized approaches like Relief-from-Royalty (for brands), Multi-Period Excess Earnings Method (for customer relationships), or Replacement Cost Method (for technology).

Step 5: Calculate Goodwill or Bargain Purchase

After assigning fair values to all assets and liabilities, the balancing figure is recognized as goodwill. If the purchase price is lower than the fair value of net assets, it results in a bargain purchase gain (rare but possible).

Step 6: Final Allocation and Reporting

Finally, the results are compiled into a structured report that forms the basis of accounting entries. The allocation must be disclosed in financial statements, with details of goodwill, intangible assets, and methods used for fair valuation.

Common Intangibles Identified in PPA

While tangible assets are relatively easy to value, intangibles often represent the bulk of the purchase price. Some common categories include:

• Brands/Trademarks
• Customer contracts and relationships
• Non-compete agreements
• Technology and software
• Licenses and permits

Each requires a careful valuation method, depending on its nature and contribution to future cash flows.

Challenges in PPA Valuation

Though the steps sound simple, PPA comes with challenges:

• Subjectivity – Valuation of intangibles often involves management assumptions.
• Data availability – Reliable market comparables may be scarce.
• Complex consideration structures – Contingent payments add uncertainty.
• Future uncertainty – Forecasting future benefits of intangibles can be tricky.

These challenges highlight why professional expertise is essential in performing PPA.

Post-PPA Considerations

Once the PPA exercise is completed, the story continues in subsequent reporting periods:

• Goodwill must undergo annual impairment testing under Ind AS 36.
• Intangibles are amortized over their useful lives, unless indefinite.
• Disclosures must provide transparency on assumptions and methods used.