Purchase price allocation (“PPA”) becomes relevant after the deal closes, usually when auditors request support for the opening balance sheet or challenge goodwill balances during the year-end audit. Depending on the size of the transaction relative to the financial statements as a whole - or, in audit terminology, the materiality of the transaction - PPAs can range from a pragmatic company-prepared analysis in a simple Excel workbook to a comprehensive external valuation exercise. The latter may include a detailed analysis of hidden reserves and assets, opening balance sheet adjustments, and WACC computations at asset level. In the small- and mid-cap segment, this often creates two opposite problems:
small acquisitions may be overengineered with unnecessary valuation work; or
material acquisitions may be underestimated, resulting in audit adjustments and delayed reporting.
If acquisitions are operational bolt-ons where the financial impact to the group is limited, auditors often accept a leaner internally prepared allocation if the acquisition is not significant to the group and the rationale is documented properly. What we typically see in practice:
Small distribution or service acquisitions frequently result in goodwill-heavy allocations with limited identifiable intangible assets.
Inventory step-ups and deferred taxes are often the only material adjustments and hidden reserves/assets identified
Finance teams underestimate how important documentation is, even for immaterial deals. A brief memo explaining why a full external valuation was not considered necessary can avoid costly external valuation services.
Where transactions become strategically significant - even if quantitatively smaller - scrutiny increases quickly. This is common in platform acquisitions, acquisitions financed through lenders, IPO-preparation environments or first-time IFRS reporting groups. In these cases, detailed management prepared or formally attested valuation report is frequently expected even if the deal size itself is moderate. In practice, the discussion is rarely binary. Most mid-market groups involve a combination of management, accounting advisors and auditors throughout the PPA process.
Internal
PPAs
For many small- and mid-cap acquisitions, the PPA is prepared internally by the finance team, often together with external accounting advisors. This approach is typically appropriate where:
the acquisition is not significant to the group (i.e., the group’s assets or revenue will not increase by more than 10% after the acquisition,
identifiable intangible assets are fairly common in other PPAs with similar size and complexity, and
audit risk is manageable (risk profile of the acquiring company does not significantly.
In practice, management or advisor-prepared PPAs are often built using due diligence outputs, management forecasts, existing customer attrition assumptions, simplified discounted cash flow support, and pragmatic inventory analyses. The main advantages are speed, cost efficiency and levering existing business understanding as opposed to onboarding and explaining the background of the business to external professionals. However, depending on transaction complexity and internal transaction accounting expertise, the auditor of the acquiring company may require the PPA to be supported or formally attested by an independent CPA firm.
External
PPAs
Externally attested valuation reports are generally required/relevant for larger or more complex transactions, particularly where:
the acquisition significantly impacts EBITDA or balance sheet metrics,
lenders or investors require formal valuation support,
significant intangible assets exist or earnout structures are complex, or
multiple jurisdictions and business units are involved.
In practice, valuation reports in small- and mid-market transactions can become overly theoretical and disconnected from operational implementation of the PPA, particularly where the outputs are not easily translated into practical acquisition accounting entries and ongoing reporting processes.
Judgment
Areas
In practice, only a limited number of intangible assets are material enough to justify separate recognition. For most mid-cap transactions, the focus is usually on customer relationships, technology or software, proprietary know-how, and occasionally brands. The key judgment areas are often customer attrition assumptions, useful life assessments, expected renewal patterns, technology obsolescence and the extent to which value should remain within goodwill rather than be separately identified as an intangible asset.
Inventory fair value adjustments are frequently underestimated because the accounting impact reverses quickly after acquisition. However, auditors focus on inventory step-ups because they directly affect post-deal gross margin. In practice, finance teams commonly struggle with:
identifying slow-moving inventory,
calculating selling costs appropriately,
obtaining sufficiently granular inventory and margin data to support inventory valuation assumptions, and
aligning valuation assumptions with operational integration plans.
For mid-market transactions, finance teams often assess representative inventory populations, margin profiles and aging categories rather than revaluing every individual inventory item separately provided the methodology is documented, assumptions are internally consistent, and the result is not materially sensitive.
Acquisition-date fair value adjustments frequently create temporary differences between accounting carrying values and local tax bases (Deutsch: Aufdeckung von stillen Reserven und Lasten). As a result, deferred taxes are one of the most common areas of adjustment and audit focus in PPAs.
In practice, teams often complete the fair value exercise first and only assess the related tax impacts shortly before audit completion, creating avoidable late-stage adjustments. Deferred tax impacts commonly arise from identifiable intangible assets recognized in the PPA, inventory fair value adjustments and differing local tax amortization treatments.
The complexity increases significantly in cross-border structures because accounting and tax treatment diverge between jurisdictions. A common misconception in mid-market deals is that deferred taxes are unnecessary where fair value adjustments are recorded only for group reporting purposes and not in the local statutory accounts. Under IFRS acquisition accounting, however, deferred taxes are generally still required for temporary differences arising from those fair value adjustments.
Useful life determination is one of the most judgmental aspects of acquisition accounting. The useful lives assigned to customer relationships, technology, brands, non-compete agreements, and backlog assets directly affect future amortization expense, deferred taxes, and post-acquisition earnings. Auditors frequently evaluate whether useful life assumptions are consistent with customer retention expectations, technological obsolescence, competitive dynamics, contractual protections, and management's integration strategy.
In practice, the key challenge is usually not the initial calculation itself, but ensuring that the goodwill position remains supportable during future impairment testing. What we typically see in practice:
- acquisition synergies supporting goodwill are poorly documented at closing,
CGU structures are not aligned with how the integrated business is managed post-acquisition, creating costly later-stage CGU restructuring and audit discussions,
management forecasts used in the PPA are not aligned with later budgeting and impairment-testing processes, and
buyers underestimate the operational burden of annual impairment testing.
Under IFRS, goodwill is not amortized and must be tested annually for impairment. Under HGB and Swiss CO, goodwill is amortized over its useful life, with a 10-year period under HGB and 5- to 10-year period under Swiss CO, commonly used where the useful life cannot be reliably estimated.
Earnouts are increasingly common in SME transactions, particularly founder-led acquisitions. From an accounting perspective, the complexity and future remeasurement implications are often not fully assessed during deal structuring. What we typically see in practice:
- earnout mechanics drafted by legal teams are difficult to translate into accounting models,
- EBITDA definitions in SPAs often differ from operational reporting metrics, creating disputes and complexity in post-deal earnout calculations,
- post-deal integration activities affect EBITDA and performance metrics used in earnout calculation,
- finance teams do not reassess contingent consideration liabilities based on updated forecasts and performance expectations at subsequent reporting dates, and
- management often treats contingent consideration as fixed deferred purchase price rather than a remeasured liability that may create P&L volatility.
Under IFRS 3.58(b)(i), contingent consideration classified as a liability is generally remeasured through profit or loss after acquisition date. This can create significant post-deal earnings volatility.
Common
Issues
- Ignoring Integration Reality: PPAs are often prepared using standalone assumptions without sufficiently considering the planned post-acquisition integration model. This frequently results in unsupported useful lives of customer relationship and technology assets, inconsistent cash flow assumptions and future impairment-testing challenges. Valuation assumptions should reflect the actual post-deal operating model and integration strategy.
- Weak Documentation Around Materiality: A common audit challenge is not necessarily incorrect accounting, but insufficient documentation supporting management's judgments and materiality assessments. Even for smaller acquisitions, concise and well-structured documentation explaining key assumptions and conclusions can significantly reduce audit queries and review time.
- No Impairment Planning from Day One: Many groups underestimate how acquisition-date assumptions influence future goodwill impairment testing. In practice, goodwill impairment challenges often arise when expected synergies are not clearly documented at closing or the forecasts used in the PPA are not linked to subsequent budgeting and performance-monitoring processes.
Tax
Considerations
Tax
treatment should be considered together with the PPA process,
particularly where significant identifiable intangible assets are
recognized. In practice, the useful lives assigned to intangible
asssets directly affect future amortization profiles, deferred taxes
and post-deal earnings. In practice buyers
focus on whether amortization is tax deductible, while management
underestimates the long-term earnings impact of amortization charges
arising from the PPA. Tax
treatment of acquisition-related goodwill and identifiable intangible
assets may differ significantly depending on whether the transaction
is structured as an asset deal or share deal.
Conclusion
For most mid-market groups, an effective PPA process is not about producing the most detailed valuation report, but about applying proportionate judgment in the areas that materially affect financial reporting. In practice, the greatest challenges usually arise around intangible assets, inventory step-ups, deferred taxes, goodwill impairment considerations and contingent consideration arrangements.
What we typically see in successful mid-market transactions is a pragmatic approach:
- Assess materiality first
- Keep valuation assumptions operationally realistic
- Align accounting, tax and integration planning early
- Document management judgment clearly and proportionately
About Group Accounting Partner
Group Accounting Partner is a modern, AI-enabled accounting advisory boutique specializing in group accounting, consolidation, and financial reporting for PE/VC-backed companies and international mid-market groups.