Introduction

In India’s evolving business landscape, mergers and acquisitions (M&A) have become instrumental in driving corporate growth, market expansion, and competitive advantage. A crucial aspect of these transactions is the identification and valuation of intangible assets as part of the Purchase Price Allocation (PPA) process under Indian Accounting Standard (Ind AS 103). This standard plays a key role in determining how business combinations are accounted for, impacting financial reporting, tax planning, and strategic decision-making.

Ind AS 103 mandates that all identifiable assets and liabilities, including intangible assets and contingent liabilities, be recognized at fair value at the acquisition date. Any remaining excess purchase price is allocated to goodwill or capital reserve. Since intangible assets often form a significant part of deal value, their identification and proper valuation are essential for compliance, transparency, and financial performance.

The Importance of Identifying Intangible Assets Under Ind AS 103

In a business combination, intangible assets often represent the core value proposition of the acquired entity. Identifying and valuing the primary intangible asset—the asset that most significantly drives future economic benefits—is central to a well-executed Purchase Price Allocation (PPA) under Ind AS 103.

Why the Primary Intangible Asset Matters

The primary intangible asset is typically the one that generates or enables the majority of the acquired business’s cash flows. Correctly identifying this asset has several implications:

• Valuation Anchor: It often serves as the anchor for the overall valuation model, particularly when applying the Multi-Period Excess Earnings Method (MPEEM), where residual earnings are attributed to the asset after deducting contributory charges.
• Amortization and Tax Planning: In some jurisdictions, the amortization of certain intangibles may be tax-deductible, enhancing post-deal tax efficiency. Identifying the right asset ensures alignment with long-term tax planning.
• Financial Reporting Clarity: Accurate identification avoids overstatement of goodwill and ensures the fair value representation of economic benefits in financial statements.
• Audit and Regulatory Alignment: It strengthens the defensibility of the allocation in audit reviews and minimizes the risk of challenges from regulators or tax authorities.

Nuances in Identifying the Primary Intangible

Determining the primary intangible is not always straightforward. It involves assessing:

• Revenue Dependency: Whether the business’s revenues are primarily linked to a customer base, a brand, proprietary technology, or a licensing model.
• Legal and Functional Control: Whether the asset is legally protected and economically controlled by the acquirer.
• Transferability: Whether the asset can be separated from the business and monetized independently.
• Synergistic Influence: Whether the asset enhances the value of other intangibles or business segments (e.g., a trademark that drives customer loyalty and sales retention).

For example, in a consumer goods acquisition, the brand may be the most valuable asset if it drives purchasing decisions. In a tech transaction, software or algorithms may serve as the primary intangible due to their critical role in delivering services or enabling automation.

Multi-Driver Scenarios: When Value is Distributed

In many transactions, value is not concentrated in a single intangible. For instance:

• A SaaS company may derive value from both its customer contracts and proprietary platform.
• A pharmaceutical firm may rely on both patents and regulatory approvals to sustain revenues.
• A digital media company may have co-primary assets in its content library and subscriber base.

In such cases, a multi-asset valuation approach is essential. The methodology typically involves:

1. Segmentation of Revenue Streams: Disaggregating revenue by driver to map which intangible contributes to which stream.
2. Contributory Asset Charges (CACs): Applying CACs for supporting assets to isolate the earnings attributable to each primary intangible.
3. Residual Income Attribution: Allocating residual income through MPEEM or hybrid approaches tailored to the specific contribution pattern of each asset.
4. Cross-validation: Benchmarking results with market-based or cost-based approaches for reasonableness.

Proper attribution in such scenarios requires collaboration between valuation experts, finance teams, and legal counsel to ensure completeness and defensibility.

Key Intangible Assets Identified in PPA

Under Ind AS 103, intangible assets must be separately identifiable and measurable. Some of the most commonly recognized intangible assets in business combinations include:

Case Studies in Ind AS 103 Application

• Pharmaceutical Industry: When an Indian pharmaceutical company acquires another firm, patents and drug formulas are the most valuable intangible assets. For example, in Sun Pharmaceutical’s acquisition of Ranbaxy, a significant portion of the deal value was allocated to patents and regulatory approvals.
• Technology Industry: In the acquisition of Indian startups, such as Flipkart’s acquisition by Walmart, substantial intangible assets included the brand value, proprietary software, and customer base.
• Retail & Consumer Goods: Hindustan Unilever’s acquisition of GlaxoSmithKline Consumer Healthcare required valuation of the Horlicks brand name, a key marketing-related intangible asset contributing to sales.

Best Practices for Implementing Ind AS 103 in PPA

1. Engage Financial Experts Early

Valuation professionals and auditors should be involved at the due diligence stage to ensure a smooth transition and accurate reporting of intangible assets.

2. Use Multiple Valuation Techniques

Different intangible assets require tailored valuation approaches. The income approach, market approach, and cost approach should be used based on the nature of the asset.

3. Ensure Regulatory Compliance

Businesses should adopt best practices to adhere to Ind AS 103, mitigate accounting risks, and ensure transparent reporting to auditors and regulators.

Challenges in Identifying and Valuing Intangible Assets

The process of recognizing intangible assets in PPA presents several challenges:

1. Separability: Some intangible assets, such as patents or trademarks, are easily identifiable, whereas others, such as workforce capabilities or synergies, do not qualify under accounting standards.
2. Legal Protection: Only legally enforceable rights, such as registered patents or licensed software, qualify for recognition as intangible assets.
3. Valuation Complexity: Certain intangible assets, particularly brand reputation or customer relationships, require sophisticated valuation models due to their dependency on future earnings.
4. Industry-Specific Considerations: Different industries prioritize different intangible assets. For instance, pharmaceutical firms emphasize patents, whereas technology firms value software and proprietary algorithms.
5. Evolving Business Models: With digital transformation, new asset classes such as data, AI models, and blockchain-based assets need structured valuation methodologies.

Outlook

With the rise of digital businesses, artificial intelligence, and intellectual property-driven economies, intangible assets are becoming increasingly significant in Indian corporate transactions. Future challenges will include:

• Recognizing and valuing AI and data-driven assets.
• Accounting for blockchain and digital ownership rights.
• Developing consistent frameworks for emerging intangible asset classes.

Conclusion

The identification and valuation of intangible assets in PPA under Ind AS 103 are crucial for businesses engaging in M&A. A well-structured approach ensures compliance, financial accuracy, and strategic tax advantages. As the Indian economy continues to evolve, businesses must stay ahead by adopting robust valuation methodologies and regulatory best practices.

Effectively managing intangible assets will not only ensure compliance but also drive long-term value creation in business combinations.