Intangibles in a purchase price allocation

After an acquisition, the buyer must allocate the purchase price to the identifiable assets acquired and liabilities assumed, measured at fair value; whatever remains is goodwill. Under IFRS 3, identifiable intangible assets acquired in a business combination must be recognised separately from goodwill and measured at fair value at the acquisition date; ASC 805 sets a similar requirement under US GAAP. The intangibles are usually the hardest and most judgemental part of the allocation.

1. Identify the intangible assets

An intangible is identifiable if it is separable or arises from contractual or legal rights. IVS 210 groups intangibles into five classes, a useful checklist when reviewing the target:

• Marketing-related: trade marks, trade names, trade designs and internet domain names.

• Customer-related: customer lists, order backlog, customer contracts and contractual and non-contractual relationships.

• Artistic-related: rights in plays, books, films, music and other artistic works.

• Contract-related: licences and royalty agreements, supply or service contracts, leases, permits, broadcast rights, non-competition agreements and natural resource rights.

• Technology-related: patented and unpatented technology, software, databases, formulae, designs, processes and recipes.

An assembled workforce is not recognised separately under IFRS 3; it remains part of goodwill, but it is still valued as a contributory asset.

2. Match each asset to a method

• Brands and trade names: relief-from-royalty, using benchmark royalty rates supported by profit split analysis.

• Customer relationships and backlog: the multi-period excess earnings method (MPEEM), or the distributor method where the business mainly distributes products.

• Technology: relief-from-royalty where licensing evidence exists, or MPEEM where technology is the primary value driver.

• Non-compete agreements: the with-and-without method, comparing cash flows with and without the protection.

• Licences and franchises that drive the business: the greenfield method.

• Assembled workforce and internally used software: the cost approach, as contributory assets.

3. The inputs that decide the result

Attrition: for customer-related assets, IVS 210 treats attrition as a key factor for both economic life and cash flows. It may be a constant or an age-dependent rate, measured on revenue or customer count, by customer segment. A good test is to run historical revenue through the attrition curve and check how well it predicts what existing customers actually bought.

Contributory asset charges: in MPEEM, deduct fair returns on and of every asset that helps the primary asset earn its income, including working capital, fixed assets, workforce and other intangibles, so that income is not counted twice.

Economic life: legal, technological, functional and economic factors must be considered individually and together. Economic life for valuation is not the same as remaining useful life for accounting or tax.

Discount rates: lower-risk assets such as working capital earn less than WACC; riskier intangibles and goodwill earn more. IVS 210 asks the valuer to consider the transaction’s internal rate of return and, where all assets of a business are valued, to perform a weighted average return on assets (WARA) analysis to confirm the rates.

Tax amortisation benefit: for financial reporting, a TAB is generally included in income-approach values because a hypothetical buyer could amortise the asset, whether or not the actual deal is taxable.

4. Test the allocation as a whole

• Reconcile the IRR implied by the price, the WACC and the WARA; a large gap points to inconsistent cash flows or rates.

• Check that goodwill makes sense: it should reflect synergies, the workforce and future customers, not unrecognised identifiable assets. A very large or very small residual deserves a second look.

• Make sure no income is counted twice, for example a brand valued by RfR whose royalty is not charged in the customer MPEEM.

• Use market participant assumptions, excluding synergies only the actual buyer can achieve.

5. Document for the auditor

Auditors will read the valuation against IVS 106 and the accounting standard. Record the identification process, each method chosen and why, every significant input and its source, sensitivity of the key assets to their main assumptions, and the reconciliation of IRR, WACC and WARA.

Sources: IVS 210 Intangible Assets, sections 20, 90, 100 and 110 (IVS 2025); EVS-IA 2026; IFRS 3 Business Combinations; IFRS 13 Fair Value Measurement. Educational summary only; always rely on the official texts.

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