Purchase price allocation

4.5.1 The acquisition method

When control is obtained, IFRS 3 / ASC 805 / Ind AS 103 prescribe the acquisition method. (1) Identify the acquirer. (2) Fix the acquisition date. (3) Recognize the identifiable assets acquired and liabilities assumed at fair value, not at the target's book values. (4) Recognize goodwill as the residual:

Goodwill = Consideration transferred + NCI + Fair value of any previously-held stake − Fair value of identifiable net assets acquired

Step (3) is the purchase price allocation (PPA). It's an exercise, usually run with valuers, that restates the target's balance sheet at deal-date fair values. It also puts on the books intangibles the target itself was never allowed to recognize. You can see this asymmetry on the intangible assets page: internally generated brands and customer lists are expensed as built, but purchased ones are assets. Typical PPA intangibles are customer relationships and contracts, brands/trade names, developed technology, order backlog, non-compete agreements, in-process R&D. A few quick hits matter to analysts. Deal/transaction costs (bankers, lawyers) are expensed, not capitalized. Contingent consideration ("earn-outs") is recognized at fair value at the deal date, and later remeasurements of liability-classified earn-outs run through P&L. And the acquirer gets up to a one-year measurement period to finalize provisional numbers.

Step-ups create book-tax differences, so deferred tax comes back into the picture. A fair-value step-up with no matching tax-base step-up creates a deferred tax liability, which reduces identifiable net assets and increases goodwill. No deferred tax is recognized on goodwill itself.

4.5.2 A full PPA, numerically

Synthetic. Arjun Pharma acquires 100% of Sundar Labs for ₹900 cr cash. Sundar's books show assets of ₹700 cr and liabilities of ₹300 cr, so book net assets are ₹400 cr. The PPA finds PP&E worth ₹100 cr more than book and inventory worth ₹20 cr more. It also finds a brand valued at ₹150 cr and customer relationships at ₹90 cr, neither of them on Sundar's books. Tax is at 25%.

Goodwill here is a residual in the purest sense. It's what Arjun paid for that it can't name: assembled workforce, synergies and any overpayment, all mixed together. None of the three frameworks amortizes it. It's impairment-only, as goodwill impairment shows, though watch for the US private-company alternative that permits amortization.

Profit after the deal, and partial vs full goodwill

Now the post-deal income statement drag. It's why acquirers' reported earnings sag just after closing, even when the deal is sound:

• The inventory step-up (₹20 cr) flushes straight through COGS as the acquired inventory sells, crushing gross margin for a quarter or two.
• Extra depreciation on the PP&E step-up: ₹100 cr / 10 yr ≈ ₹10 cr/yr.
• Amortization of acquired intangibles: customer relationships ₹90 cr / 6 yr = ₹15 cr/yr. The brand, if judged indefinite-lived, isn't amortized but is tested annually.
• A deferred-tax credit partly offsets these as the DTL unwinds (~25% of the extra charges).

That drag is the reason analysts talk about EBITA, or "EPS ex-amortization of acquired intangibles". Amortizing the customer list is a real accounting charge but not a cash cost, and the "asset" it consumes is replenished through the S&M spending already in opex. Whether to add it back is a judgment call. Serial acquirers must keep buying to sustain earnings, so for them the charge is close to economic. The ROIC work takes this debate up properly, and it returns later in Phase 3. For a sense of scale, Microsoft's Activision acquisition (closed October 2023, ~$75bn total consideration) put roughly $51bn of goodwill and $22bn of identified intangibles on Microsoft's balance sheet. Those figures are rounded and illustrative. Pull the FY24 10-K's business-combination note and read the allocation table yourself, because it's a perfect specimen.

NCI measurement choice (partial vs full goodwill). If less than 100% is bought, IFRS 3 and Ind AS 103 let you measure NCI at either (a) its proportionate share of identifiable net assets ("partial goodwill", as used in the consolidation example for Meridian–Kaveri) or (b) fair value ("full goodwill", which grosses up goodwill for the minority's share). US GAAP mandates full goodwill. So the same deal can carry different goodwill and NCI, and you need care when screening across regimes.

4.5.3 Bargain purchase: and the Ind AS 103 carve-out (state it precisely)

Now and then the price comes in below the fair value of identifiable net assets. Think of a distressed seller, or a forced bank rescue. The frameworks split here, and you need the routing for each:

• US GAAP (ASC 805) and IFRS 3: first reassess. Re-check identification and measurement, because apparent bargains are usually measurement error. If the excess survives, recognize a bargain-purchase gain in profit or loss on the acquisition date, attributed to the acquirer. For a real specimen, First Citizens BancShares booked a gain on the order of $9.8bn in P&L on acquiring Silicon Valley Bank's assets from the FDIC in 2023 (illustrative figure, so pull the filing).
• Ind AS 103 (the carve-out): the gain never touches profit or loss. If there's clear evidence of the underlying reasons for the bargain, such as a documented distress sale, recognize the excess in OCI on the acquisition date and accumulate it in equity as capital reserve. If there's no such clear evidence, recognize it directly in equity as capital reserve, without even passing through OCI. The standard-setters reasoned that a day-one profit for buying cheaply is too easy to manufacture in promoter-driven markets. Parking it in capital reserve keeps it out of EPS forever.

How should analysts treat a bargain purchase?

You handle it the same way everywhere. A bargain-purchase gain is non-operating and non-recurring, so strip it from earnings power. Under Ind AS the trap runs the other way. Because the gain bypasses the P&L, a screener will never show you that the company just bought assets at a discount. Only the note reveals it. One more India-specific point. For common-control combinations, meaning group restructurings such as merging two promoter entities, Ind AS 103 Appendix C mandates pooling of interests (book values, no goodwill, no PPA). So intra-group mergers in India produce no step-ups at all.