Purchase Price Allocation and Impairment Testing - A straight application of standards?
Abstract: The importance of goodwill and intangible assets has amplified over the years as both their presence in the standards and their values in the financial reports have increased. How the purchase price allocation (PPA) and the subsequent impairment testing process are made is of great importance as different choices have different consequences on for example the financial reports and key ratios. The purpose of this thesis is to explore and identify practices and forces affecting the implementation of IFRS 3 with respect to the allocation of the consideration transferred and the subsequent impairment tests. In order to fulfill the aim of this thesis, a quantitative and a qualitative study have been made. In the quantitative study, general tendencies in how firms allocate the consideration transferred between the major asset groups in the PPA and how often impairments are done have been investigated. The qualitative study has been based on a Swedish group where four specific acquisitions have been studied. The study of the case group revealed seven aspects that have a major impact in the reasoning process of the group when doing a PPA and the subsequent impairment testing. It was concluded that the expectations of impairments were low, that the case group had a partial lack of formal control in some areas and that the informal control within these areas not was strong enough to counterbalance the partial lack of formal control. Furthermore, practicality, materiality, internal incentives and external pressure were concluded to influence the PPA and the impairment testing. As the comparison of the case group to the quantitative sample gave no sign of the case group being an extreme outlier, the findings and conclusions made in the qualitative study can be considered as possible also for other companies. Concluding, even though standards often are considered as the determinants of accounting, it has been shown that company culture, management control systems and external influences also might be of great importance in the reasoning when performing a PPA after an acquisition and in the subsequent impairment testing.
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