Valuation Services
Purchase Price Allocation Under Ind AS 103: What Every Indian Acquirer Must Do
Lekha Editorial Team
CA-reviewed · Published
Purchase Price Allocation (PPA) is the process of distributing the total consideration paid in an acquisition across the identifiable assets and liabilities of the acquired company. In India, this is governed by Ind AS 103 (Business Combinations) and must be completed within 12 months of the acquisition date. Most Indian acquirers underestimate the complexity and cost — and underestimate the tax and financial reporting consequences of getting it wrong.
What Ind AS 103 Requires
Ind AS 103 requires that an acquirer in a business combination:
Identify the acquisition date (typically the date on which the acquirer obtains control of the acquiree)
Measure all identifiable assets acquired and liabilities assumed at their fair values at the acquisition date
Identify and separately recognise intangible assets even if the acquiree had not previously recognised them (intangibles that were developed internally — like brand value, customer relationships, technology — are not on the acquiree's balance sheet but must be identified and valued in the PPA)
Measure the consideration paid at fair value (including contingent consideration like earnouts)
Recognise goodwill as the excess of consideration over net identifiable assets (or, rarely, a bargain purchase gain)
The PPA must be completed within 12 months of the acquisition date (the 'measurement period'). Provisional values can be used within the first 12 months and then revised. After 12 months, the allocation is considered final.
Intangible Asset Identification: The Core PPA Challenge
The most technically challenging part of a PPA is identifying and valuing intangible assets that the acquired company never recognised on its own balance sheet. Common intangible assets in technology company acquisitions:
Customer relationships: the value of the existing customer base, measured by the expected future revenue from existing customers and the cost of replacing them. Valued using the Excess Earnings Method or the With-and-Without Method.
Developed technology / software: proprietary code, algorithms, platforms. Valued using the Relief from Royalty Method (what royalty rate would you pay to license this technology from a third party?) or the Multi-Period Excess Earnings Method.
Trade name / brand: for consumer-facing businesses, the brand may have significant standalone value. Valued using Relief from Royalty.
In-process research and development (IPR&D): value of R&D projects not yet commercialised at acquisition date. Classified as an indefinite-lived intangible initially; subject to impairment testing annually rather than amortisation until the project is complete.
Order backlog: value of signed but undelivered contracts. Valued at the expected margin on the backlog.
Goodwill: What It Is and What It Isn't
Goodwill in Ind AS 103 is the residual amount after allocating fair value to all identifiable assets and liabilities. It represents: assembled workforce (which cannot be separately recognised as an intangible under Ind AS 103), synergies expected from the combination, going-concern value, and intangibles that genuinely cannot be separately identified.
Under Ind AS 36 (Impairment of Assets), goodwill must be tested for impairment annually (not amortised). If the recoverable amount of the cash-generating unit to which goodwill is allocated falls below its carrying amount, goodwill is impaired. Impairment losses cannot be reversed.
A PPA that assigns too little value to identifiable intangibles and too much to goodwill creates two problems: first, more goodwill subject to annual impairment testing (and potential one-time impairment charges if the acquisition underperforms); second, tax efficiency is typically better on amortisable intangibles (5–10 year useful life) than on non-amortisable goodwill. For Income Tax Act purposes, Section 32 allows amortisation of acquired intangibles.
Key takeaway
Plan the PPA before you close the acquisition, not after. Engage a valuation specialist during due diligence — the intangible assets you identify in the PPA affect your tax position, goodwill exposure, and financial reporting for years after close. The cost of a quality PPA is small relative to the acquisition cost; the cost of a flawed PPA shows up in impairment charges years later.
Frequently asked questions
Who performs the valuation for PPA under Ind AS 103 in India?
The acquirer's management is responsible for the PPA, but the intangible asset valuations typically require specialist input from a qualified valuation professional. For Ind AS purposes, an IBBI Registered Valuer (Securities and Financial Assets class) is the most qualified professional. Some companies use international valuation firms with India presence. The valuation must follow Ind AS 113 (Fair Value Measurement) principles and the ICAI Valuation Standards.
What are the tax implications of the PPA for the acquirer?
The PPA affects amortisation deductions under the Income Tax Act. Section 32(1)(ii) allows depreciation/amortisation on intangible assets (know-how, patents, copyrights, trademarks, licences, franchises) at 25% WDV. The PPA allocation to amortisable intangibles creates tax shield over time. Goodwill from acquisition of a business (share acquisition vs. slump sale is different) may not be amortisable for Income Tax purposes following the Finance Act 2021 amendments — this is a significant distinction that affects deal structuring.
Is PPA required for all business combinations or only above a certain size?
Ind AS 103 applies to all business combinations under the Ind AS framework, regardless of size. The mandatory threshold question is whether the company is required to follow Ind AS — which applies to listed companies, companies with net worth above ₹250 crore, and subsidiaries/associates of Ind AS companies. Companies on Indian GAAP (AS framework) have a simpler treatment — AS 14 for amalgamations, with different goodwill treatment. For Ind AS companies, PPA is mandatory for every acquisition that constitutes a 'business combination'.
What is the measurement period for PPA completion?
12 months from the acquisition date. During this measurement period, the acquirer can use provisional fair values and refine them as more information becomes available. The measurement period ends when the acquirer has received all the information it was seeking about facts and circumstances that existed at the acquisition date, even if that's before 12 months. After the measurement period closes, the allocation is final and can only be changed through error correction (IAS 8/Ind AS 8), not through the PPA measurement period mechanism.
How does contingent consideration (earnout) affect the PPA?
Contingent consideration — earnout payments based on future performance — must be recognised at fair value at the acquisition date. For an earnout of up to ₹10 crore if the acquired company achieves 20% revenue growth in year 1, the acquirer must estimate the probability-weighted value of that earnout at the date of acquisition (not the maximum amount) and include it in the total consideration. Subsequent changes in the fair value of the earnout (as performance visibility improves) are treated as income or expense, not as adjustments to goodwill.