Accounting for business

combination
A study of purchase price
allocation in India
February 2023
Fore
word
We are proud to present the fourth edition of our Understanding the implications of Ind AS 103 is
Purchase Price Allocation (PPA) study. important since they not only affect the future
earnings and balance sheet of a company but
Post COVID-19, the number of Mergers & may also have tax implications, questions from
Acquisitions increased during the year ended shareholders, etc. Further, in the era of intense
31 March 2022, particularly in the backdrop of auditor and regulatory scrutiny, this matter
declined M&A activity during the previous year warrants careful attention. Depending on the
which was impacted due to the pandemic. transaction structure, PPA will also have relevance
Ind AS 103 Business Combinations (“Ind AS from an income-tax perspective, as tax treatment
103”) transforms the way companies plan and for different intangibles and goodwill could be
execute their acquisition strategies. The standard different.
applies to most of the business combinations, Ernst & Young Merchant Banking Services LLP’s
including amalgamations and acquisitions. The Valuation, Modelling & Economics Services
change in accounting for business combinations department has undertaken a study of business
calls for assets/liabilities (including intangible combination accounting for transactions that
assets and contingent liabilities which did not were disclosed in annual reports of the top 500+
exist on the balance sheet of target entities/ listed companies in India (covering over 500+
businesses) acquired in a deal to be measured at transactions) by market capitalization since
fair value applying appropriate valuation methods implementation of Ind AS till 31 March 2022. The
and residual value allocated to goodwill/capital study presents the results of assets (primarily
reserve. intangible assets) that are typically recognized
and reported by a company during an acquisition.
However, the results of this study cannot be
viewed in isolation.
Why benchmarking?

Ind AS has consistently emphasized the

importance of precise business combination
accounting. While valuation guidelines may
be prescribed in detail, assumptions and
workings are still highly subjective in nature. An
independent reasonable test is very important.
A thorough PPA study will help in keeping a
check with other transactions in a similar space.
The study will help the management, auditors,
tax officers and other advisors to assess the
reasonableness of an individual PPA and predict
the M&A impact on amortization expense.

Should you have any questions, our Valuation,

Modelling & Economics Services’ professionals
are available to provide further insights on this
study or on any other valuation topic.

Parag Mehta
Partner, Strategy and Transactions (SaT)
Valuation, Modelling & Economics
Ernst & Young Merchant Banking Services LLP
Fair value accounting of business combination and its manifold implications

Investor communications

Amortization charges Risk of impairment

Tax implication Finite vs. infinite life

Return ratios Size of balance sheet

Earnings per share Intangibles vs. goodwill

Tangible and Infinite life

finite life intangible assets
intangible assets and goodwill

Goodwill: an important element

Factors justifying goodwill

9 New customers 9 Skilled workforce

9 New geographies / reach 9 Technical skills and
9 New products efficiencies of the employees

Growth prospects Workforce

Synergies Organization model

9 Operating 9 Well-functioning organization

9 Marketing 9 Business processes and
9 Administrative routines
9 Tax 9 Overlapping assets from market
participant perspective
9 Purchasing power

4 Purchase Price Allocation Study in India

Key findings
Based on the study, 29% of the enterprise value of acquired The allocation to goodwill in India is largely in line with
companies was allocated to identified intangible assets and the proportion allocated in global deals (e.g., in the US).
34% was attributable to goodwill, with the allocation varying
considerably from industry to industry.

Number of
transactions

Overall 34% 29% 37% 574

Services 65% 21% 14% 25

IT 58% 33% 9% 96
ITeS 57% 35% 7% 51
Media and entertainment 53% 16% 30% 15
Telecommunications 41% 45% 15% 10
Retail 36% 44% 20% 6
Financial services 33% 16% 51% 12
Healthcare 30% 28% 41% 23
Logistics 27% 29% 44% 8
Chemicals 26% 26% 49% 32
Life Sciences 25% 48% 27% 63
Consumer products 24% 38% 38% 58
Industrial products 24% 26% 51% 42
Automotive and ancilliaries 22% 18% 60% 35
Others 22% 32% 47% 6
Real estate and Hospitality 15% 9% 76% 22
Building materials 15% 15% 71% 8
Infrastructure 9% 34% 57% 6
Energy 9% 13% 77% 43
Metals 5% 6% 89% 13

Goodwill Total recognized intangible assets Tangible, financial and other assets
*Tangible, financial, and other assets for financial services are higher due to higher composition of financial assets (i.e., loans and advances)
Note 1: The above numbers are average and should not be considered as a benchmark for the sector, as allocation of assets and goodwill may vary
significantly based on transaction-specific facts.
Note 2: Sectors with less than five transactions are categorized under “Others”.
Note 3: Average goodwill is after considering adjustment for capital reserves.

In sectors like telecommunications, life sciences, retail and Capital-intensive sectors, such as real estate and hospitality,
consumer products, a relatively higher proportion of deal energy, metals and building materials, allocate more than two-
value is allocated to intangible assets. This is reflected by the third of their enterprise value to tangible assets.
underlying products, brands, intellectual property, license and
rights and customer relationships. Number of intangibles identified

250 59% of transactions

Total number of transactions

In 22% of the transactions analyzed, no intangible asset was 200

recognized. These transactions majorly pertained to asset
150 22%
heavy sectors, such as real estate and hospitality, energy,
industrial products, automotive and ancillaries, etc. 13%
100
Transactions where more than two intangible assets
were identified pertained majorly to sectors like IT, ITeS, 50 5%
consumer products, chemicals and life sciences. 0
0 1 2 3 4 and
above
Number of intangibles

Purchase Price Allocation Study in India 5

Frequency of intangible assets recognized by sector
Software/
Brand/ Technology/ Customer
Number of Trademark/ platform/design/ contract/ Dealer Non-compete License Other
Sector transactions IPR know-how relationship network agreement and rights intangibles
Automotive and
35 26% 34% 20% 3% 3% 26%
ancillaries
Building
8 38% 50% 13% 13% 25% 38%
materials
Chemicals 32 38% 28% 22% 6% 19% 3% 34%
Consumer
58 48% 22% 19% 10% 12% 5% 19%
products
Energy 43 5% 14% 19% 9% 19%
Financial services 12 25% 42% 33% 8% 17% 17%
Healthcare 23 30% 13% 26% 17% 4% 35%
Industrial
42 17% 24% 26% 19% 10% 21%
products
Infrastructure 6 33% 50% 50%
IT 96 32% 32% 74% 2% 24% 3% 21%
ITeS 51 41% 33% 76% 2% 18% 2% 29%
Life sciences 63 73% 22% 13% 3% 10% 16%
Logistics 8 25% 38% 38% 13% 25% 25% 50%
Media and
15 20% 27% 20% 7% 13% 33%
entertainment
Metals 13 8% 8% 46%
Retail 6 50% 33% 17% 17%
Real estate and
22 5% 5% 5% 5% 18%
hospitality
Services 25 24% 20% 40% 16% 56%
Tele-
10 30% 30% 20% 30% 30%
communications
Total 568 33% 26% 34% 3% 12% 7% 26%

0% <15% Between 15% to 30% Between 30% to 45% Above 45%

Note: Sectors classified as “Others” are not considered in the analysis.

* Other intangibles in services, infrastructure, logistics and metals sector appear higher as the break-up of intangibles was not adequately disclosed.

Marketing-related intangibles were the key acquisition driver in the consumer products, life sciences and retail sector.

Customer-related intangibles seem to be the acquisition driver in IT/ITeS sector.

6 Purchase Price Allocation Study in India

 Allocation within intangible assets
The average allocation of an intangible asset’s value within different types of intangible assets (excluding goodwill), recognized among
sectors, is tabulated below:

Brand/ Technology/ Customer

Trademark/ platform/design/ contract/ Dealer Non-compete License and Other
Sector wise Product/ANDA know-how relationship network agreement rights intangibles
Automotive and
22% 30% 23% 1% 25%
ancillaries
Building
13% 2% 7% 5% 35% 38%
materials
Chemicals 34% 12% 13% 5% 4% 1% 31%
Consumer
50% 8% 12% 3% 2% 7% 18%
products
Energy 2% 11% 33% 19% 35%
Financial
2% 38% 37% 5% 13% 5%
services
Healthcare 35% 7% 17% 1% 2% 38%
Industrial
15% 16% 28% 11% 10% 19%
products
Infrastructure 20% 60% 20%
IT 8% 14% 60% 3% 3% 12%
ITeS 10% 11% 58% 1% 2% 2% 15%
Life sciences 65% 12% 7% 4% 11%
Logistics 10% 2% 26% 9% 13% 18% 23%
Media and
10% 18% 23% 4% 7% 38%
entertainment
Metals 2% 14% 84%
Retail 50% 18% 17% 16%
Real estate and
8% 14% 7% 14% 57%
hospitality
Services 20% 5% 31% 3% 41%
Tele-
14% 21% 23% 37% 5%
communications
Total 19% 12% 22% 4% 4% 14% 25%

0% <15% Between 15% to 30% Between 30% to 45% Above 45%

Note: Sectors classified as “Others” are not considered in the analysis.

Dealer network is an important intangible in Retail and Logistics sector.

Generally, a non-compete agreement is a part of most acquisitions as a safeguard to the buyer. However, allocation of value to
non-compete agreement is on the lower side - possibly indicating either a shorter life or probability/impact of competition is/are
perceived to be minimal.
Methodology

This study is based only on annual reports of the top 500+ listed companies in India by market capitalization for FY17 to
FY22. Transactions with enterprise value less than INR100 million were ignored. A total of 574 transactions were found
where adequate information about PPA was disclosed. Appropriate assumptions were considered with regard to classification
of intangibles where full information was not disclosed.
For certain transactions, only the total value was disclosed for all intangible assets recognized. For such transactions, the
value of intangible assets was classified under other intangible assets.
Results are presented as percentages of enterprise value. If cash and cash equivalent are not disclosed, gross debt is assumed
as net debt.

Purchase Price Allocation Study in India 7

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Purchase Price Allocation Study in India 9
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10 Purchase Price Allocation Study in India