Purchase price allocation (PPA) · IFRS 3

Allocating the purchase price of a SAR 480 million services acquisition

A listed group acquired a facilities management company and booked the entire premium over net assets, SAR 190 million, as goodwill. The auditors challenged the allocation in the first quarter after closing. We identified and valued the intangibles, restated the acquisition-date balance sheet within the measurement period, and modelled the earnings effect for the board.

Listed facilities services group, GCCPurchase Price Allocation (PPA)

SAR 190m → 58mgoodwill after recognising identifiable intangibles and fair value adjustments

SAR 132mof customer contracts, relationships, brand and order backlog recognised

SAR 16.4mannual amortisation charge the board had not previously seen in its forecasts

Within measurement periodacquisition-date balance sheet finalised before the first year-end

Context

The client

The target held multi-year facilities management contracts with government and private clients, a recognised brand in its segment, and a workforce of 2,800. The group's deal model had valued the business on an EBITDA multiple without considering how the price would be allocated for accounting purposes.

The challenge

Where the client started

The acquisition had been accounted for by recording the target's net book value and treating the entire excess as goodwill. In the first quarterly review the auditors asked for the identification and valuation of intangible assets required by IFRS 3, and the group had none.

The board was also unaware that a proper allocation would introduce amortisation that reduces reported profit, and the group's guidance to the market had been built on the deal model.

Scope

What we were engaged to do

Assessment that the acquisition was a business combination, including the concentration test
Identification of intangible assets from contracts, customer data, brand and backlog
Valuation of customer contracts and relationships, brand, order backlog and the assembled workforce as a contributory asset
Fair value of property, equipment and contingent liabilities, with external valuers for specialist equipment
Deferred tax and zakat effects, goodwill computation and allocation to cash-generating units
PPA report, amortisation schedules, restated acquisition-date balance sheet and a board paper on the earnings effect

What we did

Our approach

Understood what was boughtWe read the sale and purchase agreement, the contract register and the deal model, and interviewed the acquisition team to understand why the price was paid. The answer was the contract base and the brand, which set the priorities for the allocation.

Identified and screenedCustomer contracts and relationships, brand, order backlog, technology and a non-compete agreement were identified. Technology was screened out as immaterial after review.

Valued and reconciledCustomer contracts and relationships were valued using the multi-period excess earnings method with contributory asset charges; the brand and the non-compete with relief-from-royalty and with-and-without methods. The returns were reconciled to the deal internal rate of return and the group's weighted average cost of capital.

Reported and briefedThe PPA report supported the restated acquisition-date balance sheet within the measurement period. A board paper set out the amortisation profile, the goodwill impairment testing framework and the effect on covenants and guidance.

The outcome

What changed

Goodwill reduced from SAR 190 million to SAR 58 million after recognising SAR 132 million of intangible assets and fair value adjustments, net of deferred tax. The auditors accepted the report and its valuation assumptions on the first review, and the restated balance sheet was presented in the year-end financial statements with the measurement-period disclosure.

The board revised its earnings guidance with the amortisation profile disclosed, avoiding a surprise at the year-end, and adopted a policy that future acquisitions are modelled on a post-allocation basis before signing.

The board thought it had bought goodwill. It had bought contracts and a brand, and the accounts now say so.

Lessons

What we would tell another client

Goodwill is a residual, not a destination; if it is most of the price, the allocation has not been done.
Model the allocation before the deal closes; amortisation changes the earnings story.
The measurement period is a tool for getting the accounting right, not a reason to delay it.

Engagement details are anonymised and figures are rounded. Client identity is available on request, subject to confidentiality.

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