IFRS 3 PPA: Step-by-Step Purchase Price Allocation with Worked Example

Purchase price allocation (PPA) is the mechanical core of the acquisition method in IFRS 3 Business Combinations. It reconciles what the acquirer transferred to gain control against the fair value of the identifiable assets acquired and liabilities assumed, leaving goodwill (or, occasionally, a bargain purchase gain) as the residual. This guide walks the full sequence: identifying the acquirer and acquisition date, measuring consideration, recognising net identifiable assets at fair value, choosing a measurement basis for non-controlling interest (NCI), solving for goodwill, and the measurement-period mechanics of IFRS 3.45-50. Detailed intangible valuation techniques (MPEEM, relief-from-royalty) are covered in a separate companion article; here the focus is the end-to-end allocation, the goodwill/NCI residual and the auditor's lens.

What is purchase price allocation under IFRS 3?

PPA is the process of allocating the consideration transferred in a business combination to the identifiable assets acquired and liabilities assumed, each measured at acquisition-date fair value, with any excess recognised as goodwill. IFRS 3.4-5 requires every business combination to be accounted for using the acquisition method, and IFRS 3.5 sets out its four steps: identify the acquirer, determine the acquisition date, recognise and measure the identifiable net assets and any NCI, and recognise and measure goodwill or a bargain-purchase gain.

The recognition principle (IFRS 3.10) is that the acquirer recognises, separately from goodwill, the identifiable assets, liabilities and any NCI at the acquisition date. The measurement principle (IFRS 3.18) is that those items are measured at fair value as defined by IFRS 13 Fair Value Measurement — an exit price in an orderly transaction, not the target's carrying amount. Certain exceptions apply: income taxes follow IAS 12, employee benefits IAS 19, and reacquired rights, share-based payment awards, indemnification assets, contingent liabilities and assets held for sale each have their own measurement rule (IFRS 3.24-31A).

Why fair value, not book value: The target's own books rarely show acquired customer relationships, brands or in-process technology, and its PP&E and debt are usually carried at historical or amortised amounts. PPA "steps up" the balance sheet to fair value and surfaces the intangibles that the price actually paid for — which is precisely where goodwill is either justified or exposed as an over-payment.

How do you identify the acquirer and the acquisition date?

The acquirer is the entity that obtains control of the acquiree, and the acquisition date is the date on which control passes — usually the closing date. IFRS 3.6-7 require one of the combining entities to be identified as the acquirer using the control guidance in IFRS 10; where that is inconclusive, IFRS 3.B14-B18 provide factors such as which entity transfers cash, issues equity, is larger, or whose management dominates the combined entity.

Getting the acquisition date right (IFRS 3.8-9) is not a formality: it fixes the date at which fair values are measured, the share price used to value equity consideration, and the start of the 12-month measurement period. Control legally usually transfers when consideration is paid and the acquirer takes possession of the acquiree's net assets, but a written agreement can pass control earlier or later — the substance governs. Where the acquirer already held an equity interest (a step acquisition), that previously held interest is remeasured to fair value at the acquisition date with the gain or loss in profit or loss; see our step acquisitions article for the mechanics.

How is consideration transferred measured?

Consideration transferred is measured at fair value, calculated as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred to former owners, and equity interests issued by the acquirer (IFRS 3.37). Crucially, acquisition-related costs — legal, due-diligence, advisory and valuation fees — are not part of consideration; IFRS 3.53 requires them to be expensed as incurred, and loading them into the deal price is a classic error that inflates goodwill.

Each component is measured at its own acquisition-date fair value: cash at face, deferred cash at present value, and equity shares issued at the acquirer's quoted price on the acquisition date (not the price on the announcement or signing date). Debt or preference shares issued to sellers are measured under IFRS 9. Where the acquirer settles a pre-existing relationship with the acquiree (for example a supply contract), that settlement is accounted for separately from the combination (IFRS 3.51-52) and excluded from consideration.

Contingent and share-based consideration

Contingent consideration — an earn-out — is recognised at its acquisition-date fair value as part of consideration transferred (IFRS 3.39). Its later classification drives subsequent accounting: an obligation classified as a liability is remeasured to fair value each period through profit or loss, whereas contingent consideration classified as equity is not remeasured (IFRS 3.40, 3.58). Only changes that are measurement-period adjustments — reflecting facts that existed at the acquisition date — adjust goodwill; everything after is post-combination performance. Our contingent consideration article works through earn-out remeasurement in depth. Replacement share-based payment awards issued to the acquiree's employees are split between pre-combination service (consideration) and post-combination service (remuneration expense) under IFRS 3.B56-B62.

How are identifiable assets and liabilities measured?

Identifiable assets acquired and liabilities assumed are recognised separately from goodwill and measured at their acquisition-date fair values under IFRS 3.18. "Identifiable" (IFRS 3.B31) means an asset is either separable — capable of being sold, licensed or transferred — or arises from contractual or legal rights, even if not separable. This is the test that forces recognition of customer relationships, order backlogs, brands, developed technology and non-compete agreements that the target never had on its own balance sheet.

The acquirer may recognise assets and liabilities the acquiree had not recognised, and must ignore the acquiree's own carrying amounts. Tangible items are fair-valued: receivables at the present value of expected collections (not gross), inventory at a level reflecting selling price less costs to complete and a reasonable margin, PP&E at market or depreciated replacement cost, and assumed debt at fair value. A contingent liability is recognised even if an outflow is not probable, provided it is a present obligation from a past event with a reliably measurable fair value (IFRS 3.22-23) — a deliberate departure from IAS 37.

Deferred tax on fair value adjustments

Fair value step-ups create temporary differences because the tax base is usually unchanged, and IAS 12 requires a deferred tax liability (or asset) on each, measured at the applicable rate. This deferred tax is itself an identifiable item, so it reduces net identifiable assets and — because goodwill is the residual — increases goodwill. IAS 12.15 and 12.21 specifically prohibit recognising deferred tax on the goodwill arising, avoiding a circular calculation; the DTL is booked only on the identifiable step-ups. Omitting this DTL is one of the most common and material PPA errors.

How are goodwill, NCI and a bargain purchase determined?

Goodwill is a residual: it equals the consideration transferred plus any NCI plus the fair value of any previously held interest, less the fair value of net identifiable assets acquired (IFRS 3.32). Because it is a plug, goodwill absorbs every measurement decision made above it — an intangible left unrecognised, a fair value overstated, or a DTL omitted all flow straight into the goodwill line.

Goodwill = (Consideration + NCI + FV of previously held interest) − FV of net identifiable assets

NCI at fair value vs proportionate share

For each acquisition, IFRS 3.19 gives the acquirer a free, transaction-by-transaction policy choice for measuring NCI in the acquiree: at fair value (the "full goodwill" method), or at the NCI's proportionate share of the acquiree's identifiable net assets (the "partial goodwill" method). The choice changes the goodwill recognised: measuring NCI at fair value grosses up both NCI and goodwill to include the NCI's share of goodwill, while the proportionate method recognises only the parent's share of goodwill. The proportionate option is available only for NCI that are present ownership interests entitling holders to a share of net assets on liquidation; other NCI (for example share options) are measured at fair value.

Bargain purchase gains

Where the fair value of net identifiable assets exceeds the consideration plus NCI, the excess is a bargain purchase gain recognised in profit or loss on the acquisition date (IFRS 3.34). But IFRS 3.36 first requires a mandatory reassessment: the acquirer must re-check that it has correctly identified all assets and liabilities, and re-measure the consideration, NCI and any previously held interest, before concluding a gain genuinely exists. A bargain purchase is rare (distress sales, forced disposals) and a credit to profit is inherently suspicious, so auditors treat any residual gain as a prompt to challenge the whole allocation rather than a windfall to be booked.

Worked example: the PPA bridge and acquisition journal

Buyer GlobalTech Consulting acquires 80% of the equity of EngineerPro Ltd on 1 October 2025, obtaining control. The example carries an 80% holding so the NCI policy choice is visible. Tax rate is 19%.

Consideration transferred

Fair value of net identifiable assets

The deferred tax liability is 19% of the net taxable step-ups: PP&E +8.0, technology +25.0, customer relationships +18.0, brand +7.0, less the receivables write-down of 2.0 and the contingent liability of 3.0 — a net taxable temporary difference of £58.0m × 19% = £11.02m.

Goodwill bridge and journal

NCI is measured under the proportionate-share method (IFRS 3.19): 20% × £89.98m = £17.996m, rounded to £18.0m. Goodwill is then the residual under IFRS 3.32.

Under the alternative full-goodwill method, if the fair value of the 20% NCI were, say, £22m, goodwill would instead be 158.0 + 22.0 − 89.98 = £90.02m, with NCI grossed up correspondingly. The acquisition journal (consolidated, £m) is:

The £4.0m of advisory fees are expensed separately and never touch this journal. Goodwill of £86.02m is 54% of consideration, which is high — for a services target rich in people and synergies it can be defensible, but it is exactly the ratio an auditor probes to confirm no identifiable intangible was swept into the residual.

What is the measurement period (IFRS 3.45-50)?

The measurement period is the window after the acquisition date during which the acquirer may retrospectively adjust provisional amounts as it obtains new information about facts that existed at the acquisition date. IFRS 3.45 allows this, and IFRS 3.50 caps the period at a maximum of 12 months from the acquisition date. If the initial accounting is incomplete at the first reporting date, the acquirer reports provisional amounts and discloses that fact (IFRS 3.45).

The discipline is strict. IFRS 3.46 permits adjustment only for information about conditions that existed as of the acquisition date — a valuation that resolves a fair value known but not yet quantified at closing. New events after the acquisition date (a customer lost in month three, a subsequent legal ruling on new facts) are not measurement-period adjustments; they are post-combination profit or loss. IFRS 3.49 requires such adjustments to be recognised retrospectively, restating comparative goodwill and prior-period figures as if the accounting had been complete at the acquisition date, with a corresponding adjustment to goodwill (IFRS 3.48). Once the period closes, IFRS 3.50 prohibits any further adjustment except to correct an error under IAS 8.

PPA audit red flags

PPA is one of the highest-risk areas in a group audit because goodwill is a residual that absorbs every optimistic assumption. Three recurring findings, each tied to a specific standard:

Red flag 1 — loading goodwill to dodge amortisation (ISA 540)

Management under-identifies amortising intangibles (customer relationships, technology, backlog) so the value falls instead into non-amortising goodwill, flattering future earnings. Under ISA 540 (Auditing Accounting Estimates), the auditor challenges the completeness of the intangible schedule against the deal rationale and the acquirer's own investment model: if the board paid for a customer base, a PPA showing near-zero customer intangible is internally inconsistent. Expect the auditor to require a valuation specialist and to benchmark the intangible-to-goodwill split against comparable transactions.

Red flag 2 — unsupported fair values and specialist reliance (ISA 500)

PP&E or brand values are stepped up on thin evidence, or the valuation report's discount rate, royalty rate or attrition assumptions are not corroborated. ISA 500 (Audit Evidence) and ISA 620 require the auditor to evaluate the competence, objectivity and methodology of management's expert, not merely accept the number. A weighted average return on assets (WARA) reconciliation to the internal rate of return of the deal is a standard test that the individual asset returns are collectively reasonable.

Red flag 3 — day-two measurement-period abuse (ISA 240)

Post-acquisition operating losses or impairments are re-characterised as "measurement-period adjustments" and pushed back into goodwill to keep them out of profit or loss. Because this straddles the IFRS 3.46 acquisition-date-conditions test, ISA 240 (Fraud) treats aggressive re-dating of bad news as a potential management-override red flag. The auditor obtains evidence of when the underlying condition arose and refuses retrospective goodwill treatment for genuinely post-combination events.

Case study: Microsoft / Activision Blizzard PPA

Frequently asked questions

Is goodwill amortised under IFRS 3?

No. Goodwill is not amortised under IFRS; it is carried at cost less accumulated impairment and tested for impairment at least annually under IAS 36. This is why the intangible-versus-goodwill split matters so much: identifiable intangibles are amortised over their useful lives and hit profit each year, whereas goodwill sits until an impairment is triggered.

What is the difference between consideration transferred and purchase price?

Consideration transferred is the IFRS 3.37 fair value of cash, deferred payments, shares and contingent consideration given to the seller. It excludes acquisition-related costs such as legal and advisory fees, which IFRS 3.53 requires to be expensed, and it is measured at the acquisition date — so equity consideration uses the acquisition-date share price, not the announcement price.

Can goodwill ever be negative?

A negative residual is a bargain purchase gain, not negative goodwill. Under IFRS 3.34 the excess of net identifiable assets over consideration is credited to profit or loss, but only after the IFRS 3.36 mandatory reassessment confirms all assets, liabilities and consideration were correctly measured. Genuine bargain purchases are rare and usually arise from forced or distressed sales.

How does the NCI measurement choice change goodwill?

Measuring NCI at fair value (full goodwill) grosses up both NCI and goodwill to include the NCI's share of goodwill; measuring NCI at its proportionate share of net identifiable assets (partial goodwill) recognises only the parent's goodwill. IFRS 3.19 lets the acquirer choose per transaction, but the proportionate option is available only for present ownership interests entitled to a share of net assets on liquidation.

How long is the measurement period?

A maximum of 12 months from the acquisition date (IFRS 3.45, 3.50). During it, provisional amounts can be adjusted retrospectively — with a corresponding change to goodwill — but only for new information about facts that existed at the acquisition date. After 12 months, only IAS 8 error corrections are permitted.

Does recognising intangibles increase or decrease goodwill?

Recognising more identifiable intangibles reduces goodwill directly, because goodwill is the residual after net identifiable assets. However, each intangible step-up also creates a deferred tax liability under IAS 12 (its tax base is typically nil), and that DTL reduces net identifiable assets and therefore adds back some goodwill. The net effect still lowers goodwill, but by less than the gross intangible value.

Do acquisition costs form part of the cost of the acquisition?

No. IFRS 3.53 requires acquisition-related costs — advisory, legal, valuation and due-diligence fees — to be expensed in the periods incurred, with the exception of debt and equity issuance costs, which follow IFRS 9 and IAS 32. Capitalising deal costs into consideration is a common error that overstates goodwill.

About the author

Usman Qureshi is a Chartered Certified Accountant (ACCA) working in audit and advisory. He writes the IFRS, FRS 102 and US GAAP guides published on this site. Membership is listed on the ACCA public register.