The purpose of this document is to outline the background to purchase price allocation, the process as well as commonly used methodology in valuing intangible assets

1. PURCHASE PRICE
ALLOCATION (PPA)
GUIDE

2. GLOSSARY
2
AFS Annual Financial Statements
Acquisition date 31 May 2012
Capex Capital expenditure
CAC Contributory asset charge
CAPM Capital Asset Pricing Model
CGU Cash generating unit
DCF Discounted Cash Flow
FCF Free Cash Flow
FV Fair value
IFRS International Financial Reporting Standards
IFRS3 IFRS3: Business combinations (Revised)
Kd Cost of debt
Ke Cost of equity
MEEM Multiperiod Excess Earnings Method
NAV Net asset value
PAT Profit after taxation
PPA Purchase price allocation
RFR Relief-from-Royalty Methodology
WACC Weighted Average Cost of Capital
WARA Weighted Average Return on Assets

3. INTRODUCTION

4. BACKGROUND TO PPA’S
In terms of IFRS3, for every business combination, one
of the combining entities shall be identified as the
acquiror. An acquiror and acquiree are defined as
follows:
› Acquiror The entity that obtains control of the
acquiree.
› Acquiree The business or businesses that the
acquiror obtains control of in a business combination
› The acquiror is also expected to identify the
acquisition date, which is the date on which it
obtains control of the acquiree.

5. PURCHASE PRICE ALLOCATION PROCESS
Cost of the
combination
Carrying
amount of the
company’s net
assets
Fair value of the
company’s net
assets
Deferred tax
liabilities
New carrying
amount of the
company’s net
assets
Goodwill
Determination of
the total cost of the
combination
(purchase price +
transaction costs)
Identification of the
tangible and
intangible assets
and liabilities of the
acquired entity
Estimation of the
remaining economic
useful life of the
acquired assets
Estimation of the
fair values of the
acquired assets and
liabilities
Allocation of the
purchase price to
assets and liabilities
on the basis of their
fair values
Calculation of
deferred taxes if
necessary
Calculation of
goodwill as a
residual
1 2 3 4 5 6 7
To be completed within 12 months
Before PPA After PPA
Purchase price allocation process

6. IDENTIFICATION OF INTANGIBLE ASSETS
Identified To be valued Description
Yes/No? Yes/No?
Marketing related intangible assets
Trade marks, trade names
Internet domain names
Non-competition agreements
Customer related intangible assets
Customer lists
Order or production backlog
Customer contracts and related customer relationships
Non-contractual customer relationships
Contract based intangible assets
Advertising/Management/Service or Supply contracts
Lease agreements
Use rights such as water, mineral etc
Employment contracts priced below market value
Technology based intangible assets
Databases

7. RECOGNITION OF IDENTIFIABLE ASSETS AND
LIABILITIES (1/3)
› In terms of IFRS3 the acquiror shall recognise separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree. The
identifiable assets acquired and liabilities assumed should be measured at their acquisition date
fair value.
› According to the definitions in appendix A of IFRS3, the standard of value to be used in the
application of acquisition accounting rules is fair value.
› “Fair value” is defined as the price at which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm's length transaction.

8. RECOGNITION OF IDENTIFIABLE ASSETS AND
LIABILITIES (2/3)
The process to be followed to allocate the cost of the
business combination is as follows:
› Identify cash generating units;
› Identify the tangible and intangible assets acquired,
and liabilities and contingent liabilities assumed;
› Estimate the remaining useful lives of the acquired
assets;
› Estimate the fair values of the acquired assets,
liabilities and contingent liabilities;
› Calculate deferred taxes; and
› Determine residual goodwill.

9. RECOGNITION OF IDENTIFIABLE ASSETS AND
LIABILITIES (3/3)
Accounting for business combinations requires an extensive analysis to detect, recognise and
measure at fair value the acquired tangible and intangible assets and liabilities. This is a particular
challenge in the case of intangible assets, which are by nature less detectible than tangible items.
IFRS3 requires that an intangible asset be recognised as an asset apart from goodwill if it meets the
criteria for initial recognition of an intangible asset in accordance with IAS 38. These criteria are:
› The intangible asset must be separable (i.e. it must be capable of being separated or divided
from the entity and sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, identifiable asset or liability); or
› The intangible asset arises from contractual or other legal rights, regardless of whether those
rights are transferrable or separable from the entity or from other rights and obligations.
In terms of IFRS3 the consideration transferred must be allocated to each of the determinable cash
generating units.

10. INTANGIBLE ASSETS
VALUATION
METHODOLOGY

11. METHODOLOGY
› IFRS3 requires that all identifiable assets and liabilities acquired in a business combination are
recorded by the acquiror at fair value. Quoted market prices in active markets are the best
evidence of fair value and are used as the basis for measurement, if available.
› If quoted market prices are not available, the estimate of fair value shall be based on the best
information available, including prices for similar assets and liabilities and the results from using
other valuation techniques.
› In practice, different estimation techniques are applied based on the nature of the intangible
asset being valued. The three commonly applied approaches to the valuation of intangible assets
are discussed below.

12. METHODOLOGY
Market approach
› The market approach provides an indication of the fair value of an
asset by comparing the asset under review to similar assets that
were bought and sold in recent market transactions. A fair value
estimate is generally derived from the transaction price for an asset
or a number of similar assets for which observable market data is
available.
› Intangible assets are typically transferred only as part of the sale of
a going concern, not in piecemeal transactions. Furthermore, since
intangible assets are unique to a particular business entity,
comparison between entities would be difficult to make even if the
data were available.

13. METHODOLOGY
Cost approach
› The cost approach seeks to estimate the fair value of an
amount by quantifying the amount of money that would be
required to repurchase or reproduce the asset under review.
The cost approach also takes into account physical
deterioration (usually not a factor with intangible assets) and
use as well as technological and economic obsolescence, if
relevant.

14. METHODOLOGY
Income approach
› Valuation methods following the income approach estimate the price an
asset could be sold for in an arm's length transaction on the basis of the
assets' expected future income streams.
› In the income approach, an economic benefit stream derived from the
asset under analysis is selected, usually based on forecast cash flow.
This selected benefit stream is then discounted to a present value at an
appropriate risk-adjusted discount rate.
› The discount rate takes account of the general market rates of return at
the valuation date, business risks associated with the industry in which
the Company operates, and risks specific to the assets being valued.

15. Income approach
The income-based methods which are most
commonly applied in practice include:
› The Multi-period Excess Earnings Method
(“MEEM”);
› The Relief from Royalty method.
METHODOLOGY

16. EXCESS EARNINGS METHOD
After-tax operating
aggregate
Cost of invested capital Excess earnings attributable to
the intangible asset
Value of the
intangible asset
Discount facto

17. RELIEF FROM ROYALTIES APPROACH
Revenues generated
under the tradename
Royalties on the tradename Cash flows attributable
to the tradename
Value of the
tradename/ technology
Discount facto
Less protection costs and tax

18. ALLOCATION OF PURCHASE PRICE TO CGU’S
› The most significant adjustments in a PPA exercise relate to the
reversal of the previously recognised goodwill, the recognition
of the fair value of the trademarks, the customer contracts and
customer relationship, and other intangible assets identified
and valued as well as the adjustment to the deferred tax
liability related to the aforementioned revaluations.
› The recognition of the intangible assets at fair value gives rise
to a difference between the carrying value
of these asset and their tax bases. Deferred tax should be
recognised at the statutory tax rate on the difference between
the carrying values and the tax bases.

19. BASIC INFORMATION
REQUEST LIST

20. IRL FOR A PPA ASSIGNMENT
› Sale of business agreement
› Restraint of trade agreements
› Take on Balance Sheet at Transaction date
› An identification of the cash generating units within the Company
General
› Latest forecasts and budgets
Financial information
Complete intangible asset identification checklist

21. THANK YOU