Living with a purchase price allocation after year one
Subsequent measurement of a purchase price allocation is underestimated: the entries carry for years, and each one has to be justified again.
Let’s take a scenario where your company acquires a business with factories in four different countries. You go through an elaborate process of completing a PPA, and at the end of it, you have a long report with a listing of assets, their fair value, and remaining useful life — say 600 assets in one location. So far, so good.
But now, let’s fast forward to the year-end. Your team member who handled the PPA has quit, and you can’t find the Excel attachment that was supposed to be with the PPA report. Even if you do find it, you now have to manually depreciate the fair value adjustments over the remaining useful life. And if certain assets are depreciated using the diminishing value method, things can get even more complicated.
Why does this happen? Simply put, your ERP is not configured to handle fair value adjustments arising from a business combination. And if we fast forward another year, the auditors may find serious discrepancies, such as disposed assets still carrying the fair value allocation, incorrect computations, or changes in tax rates that were not accounted for. These errors can be material and may even require discussions on restatement.
Another problem is that most companies don’t pick up on these issues earlier, because budgets and forecasts don’t usually consider fair value adjustments. And if, for some reason, you need to book an impairment, things get even more complicated, as you’ll need to allocate the impairment losses and recompute depreciation rates.
At FINAHQ, we’ve experienced these challenges firsthand as controllers and consultants. That’s why we’ve created an asset register to help you automatically amortise and depreciate your fair value adjustments, with added functionality to book impairment losses at the individual asset line-item level and remove fair value adjustments for assets sold. Contact us to learn more about how we can help you manage your PPA and fair value adjustments with ease.
Part of Intercompany. Matching balances between group companies, the eliminations that follow, and the transactions that never match on the first pass.
Questions
Commonly asked
Why is a purchase price allocation hard to maintain after the first year?
Because the PPA report is a point-in-time document and the adjustments it creates are recurring. A listing of 600 assets with fair values and remaining useful lives has to be depreciated every period afterwards, usually from a spreadsheet nobody owns once the person who built it leaves.
What makes diminishing-value assets worse?
The fair value uplift has to follow the same method as the underlying asset, so a straight-line schedule cannot stand in for it. Each asset's adjustment has its own curve, which is exactly the kind of work that gets approximated under time pressure.
What should survive a PPA besides the report?
The schedule that produces the periodic entries, in a form the next person can run without reconstructing it — and a trail from each entry back to the asset it belongs to.
Related
Intercompany transactions in a group that keeps acquiring
Elimination entries are a key adjustment to consolidated statements, and an acquisitive group changes which ones are needed every year.
Unusual intercompany transactions: sub-leases and ESOPs
Two intercompany transactions that do not eliminate the way the others do, and what each one leaves behind in the consolidated numbers.
What makes intercompany reconciliation hard to automate
Intercompany reconciliation is the step most groups do by hand. What actually blocks automation, and what it takes to get past each one.