Purchase price allocations that identify what you actually bought.

Under IFRS 3 a business is an integrated set of activities and assets that includes, at minimum, an input and a substantive process that together contribute to creating outputs. The optional concentration test lets you conclude that the acquisition is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets, for example a single property or a portfolio of similar properties. The distinction matters: business combinations recognise goodwill and deferred tax and expense transaction costs, while asset acquisitions allocate cost to the assets on a relative fair value basis with no goodwill. Real estate and single-licence acquisitions in the region often fall close to the line and need a documented assessment.

Customer contracts and relationships are the most frequent and usually the largest, particularly in distribution, contracting and services businesses with recurring revenue. Brands and trade names arise in consumer, retail and food businesses. Licences, permits and concessions are common in financial services, healthcare, education and infrastructure. Technology, software and databases arise in fintech and technology acquisitions. Order backlog is recognised in contracting businesses. An assembled workforce is not recognised separately; its value is subsumed in goodwill, although it is used as a contributory asset charge in valuing other intangibles.

Customer relationships are usually valued using the multi-period excess earnings method, which projects the cash flows attributable to existing customers, net of attrition, and deducts contributory asset charges for the other assets that support them. Brands, technology and licences are usually valued using the relief-from-royalty method, capitalising the royalties the acquirer avoids paying by owning the asset. Non-compete agreements and certain contracts use the with-and-without method, comparing cash flows with and without the asset. Internally developed software and certain databases may use a replacement cost approach. The choice is documented and the discount rate for each asset reflects its risk, reconciled through a weighted average return on assets analysis to the deal internal rate of return and the acquirer's weighted average cost of capital.

Useful lives reflect the period over which the asset is expected to generate benefits: customer relationships from observed attrition rates, typically five to twelve years; brands from their market position, which may be finite or indefinite; licences from their contractual term including renewals that are reasonably certain; technology from its replacement cycle, often three to seven years. Finite-lived intangibles are amortised over these periods, usually on a straight-line basis, and the amortisation reduces post-acquisition profit. Indefinite-lived intangibles and goodwill are not amortised and are tested for impairment annually.

Fair value adjustments create temporary differences between the carrying amounts in the consolidated financial statements and the tax bases, which give rise to deferred tax liabilities under IAS 12 for entities subject to income tax, including the tax share of mixed Saudi companies. Recognising deferred tax on the intangibles increases goodwill. For zakat, the acquired balance sheet enters the zakat base computation of the acquirer or the acquired entity depending on the structure, and long-term investments in subsidiaries are deductible from the base under conditions that should be confirmed. We compute both effects and coordinate with your tax advisor on the filing positions.

IFRS 3 allows the acquirer up to twelve months from the acquisition date to finalise provisional amounts where information about facts and circumstances that existed at the acquisition date was not yet available. Adjustments within the measurement period are made retrospectively to the acquisition-date balance sheet and goodwill. After the measurement period, adjustments are errors or changes in estimate under IAS 8. We recommend completing the allocation before the first reporting date after the acquisition where possible, and disclosing clearly which amounts remain provisional if that is not achievable.

Contingent consideration, such as an earn-out, is measured at fair value at the acquisition date and included in the consideration transferred. Where it is classified as a liability, it is remeasured at fair value at each reporting date with changes recognised in profit or loss, which can produce volatility that surprises boards when the acquired business outperforms. Where it is classified as equity it is not remeasured. The classification depends on the settlement terms and requires analysis under IAS 32. Payments to former owners that are contingent on continued employment are remuneration for post-combination services, not consideration.

Combinations of entities under common control, such as a group reorganisation that moves a subsidiary from one parent to another, are outside the scope of IFRS 3. There is no IFRS that addresses them directly, and entities choose an accounting policy, most commonly predecessor accounting, under which the assets and liabilities are carried over at the transferring entity's book values with no goodwill. The policy must be applied consistently and disclosed. We advise on the policy choice and its effect on the consolidated and separate financial statements of the entities involved.