M&A valuations often turn on purchase price allocation (PPA) requirements set out by International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). Both frameworks require the acquisition method, but they differ when it comes to measurement, recognition, and accounting for assets and liabilities assumed. These differences can influence reported deal values by millions.
Under IFRS 3 “Business Combinations,” every transaction follows the four-step acquisition method: identifying the acquirer, determining acquisition date fair values, recognizing and measuring identifiable assets and liabilities, and recognizing goodwill or gain from a bargain purchase. US GAAP’s ASC 805 is similar, with its own set of exceptions for scope and measurement – differences that often affect reported goodwill and deferred tax balances.
In M&A accounting, details such as these can have a significant effect on deal economics.
IFRS defines intangible assets as identifiable non-monetary items without physical substance, arising from contractual or legal rights or from separability. US GAAP, under ASC 805-20, recognizes intangibles with a broader view on separability – any intangible that can be sold, transferred, licensed, rented or exchanged qualifies, with or without associated legal rights.
For example, in technology company acquisitions, customer relationships may only meet IFRS’s stricter control test when explicit contractual arrangements exist. Under US GAAP, relationships are recognized as intangibles if they are separable from the business, even without contracts.
This difference can shift significant value from goodwill into amortizable intangibles, affecting both balance sheets and post-deal earnings. In practice, a SaaS acquisition with undocumented customer relationships might see those relationships recognized under US GAAP and left within goodwill under IFRS, directly changing the allocation and future amortization charges.
Both frameworks require contingent consideration to be measured at fair value at the acquisition date. Their approaches part ways after the purchase:
This divergence leads to different exposures to volatility in post-deal reported results. Under IFRS, contingent payouts that depend on post-close performance can move earnings up or down. US GAAP deals structured with equity-classified earnouts see no post-close impact on the P&L.
| Framework | Contingent Consideration Treatment | P&L Impact |
|---|---|---|
| IFRS | All remeasured through P&L | High volatility |
| US GAAP | Equity-classified stays in equity | Lower volatility |
Both standards require deferred tax accounting for fair value adjustments, but apply different rules:
Suppose a €200 million asset revaluation leads to a €50 million DTL under both frameworks. But if there’s a €30 million goodwill step-up, US GAAP excludes it from DTLs, while IFRS applies a 25% tax, adding €7.5 million to liabilities. This changes the net asset value calculated after the deal and may influence price negotiations.
Both frameworks calculate goodwill in the same way: the consideration transferred (plus non-controlling interest and any previously held equity), minus identifiable net assets. The differences emerge after Day 1:
For impairment testing:
IFRS’s approach typically leads to less frequent but occasionally larger impairments; US GAAP may trigger impairments more often yet they cannot be reversed.
When creating discounted cash flow (DCF) models, analysts should reflect the acquisition framework’s implications:
Many analysts produce parallel PPA schedules – one for IFRS, one for US GAAP – then create blended D&A schedules and WACC values, weighted by geography and investor base.
For a step-by-step explanation on creating valuation models, visit our discounted cash flow model walkthrough.
Banks and debt investors carefully scrutinize reported post-acquisition leverage. Under US GAAP, earlier recognition of amortization drives up reported debt/EBITDA ratios. By contrast, IFRS’s approach (recognizing more goodwill and less amortizable intangibles) tends to shift leverage away from ratios counted in covenant definitions, which can possibly help borrowers negotiate for better credit terms.
The choice of accounting framework thus also influences access to capital and financial flexibility.
Earnouts are commonly used to bridge gaps between buyers and sellers. Under IFRS, these earnouts impact reported results through the P&L, while US GAAP allows equity-classified earnouts to avoid this volatility – though strict equity documentation is required.
Deal teams should stress-test synergies and earnings under both accounting standards to anticipate the potential impacts on credit ratios and investor reporting.
For more about how earnouts affect structuring and valuation, see our guide on earnout valuation techniques.
It’s often said US GAAP produces more amortizable intangibles, but this isn’t always the case. IFRS, in certain sectors – including pharma and biotech – can recognize in-process R&D (IPR&D) more broadly.
Recent comprehensive comparisons are rare, with few cross-industry studies since 2019, so most conclusions are drawn from fragmented accounting firm studies. Where deal value depends substantially on intangible asset recognition, this lack of data can matter significantly.
In low-tax regimes, DTL differences are sometimes thought insignificant. However, a buyer operating in a tax rate of 10% may face only a fractional DTL under IFRS, while under US GAAP a large base of goodwill can result in large differences due to the DTL exception. These variations can lead to distinct final PPA numbers and surprise both buyers and sellers.
Both standards allow PPA adjustments during a measurement period of up to one year, but there’s little public data about how common or material these adjustments are. Delays in final purchase accounting can mask the scale of early booking errors or adjustments due to updated synergy or earnout assessments.
More transparency on this point would help acquirers better compare synergies or see where adjustments are routinely required.
The FASB and IASB released a 2023 joint research paper that discussed possible alignment of impairment testing models. Both have stated a commitment to the acquisition method, but debates continue regarding one-step versus two-step impairment tests and DTL exceptions. Many industry groups are monitoring whether the standards boards will further align deferred tax treatment – removing US GAAP’s exception for goodwill and indefinite-lived intangibles, for example.
If future convergence occurs, significant valuation and reporting methods could change for cross-border and multinational M&A. Conversely, persistent divergences will keep dual-track deal modeling essential for analysts and advisors.
For additional discussion of technical requirements in purchase accounting, check out our comprehensive guide on goodwill and purchase price allocation in M&A.
Differences between IFRS 3 and US GAAP ASC 805 impact not just how assets, liabilities, and goodwill are reported, but also have downstream effects on deal structure, leverage, and even post-merger financial flexibility.
For deal teams, understanding these nuances – especially around intangible asset recognition, deferred tax liabilities, contingent consideration, and goodwill impairment – is critical. Accurate, side-by-side modeling under both standards is increasingly common in cross-border M&A, providing insight into how a target’s value or financing flexibility might adjust with changes in accounting treatment.
Regular reviews of accounting treatment and industry practice, along with constant communication with auditors and advisors, help minimize surprises post-close. As regulatory bodies continue to study and refine standards, staying up to date with technical and practical developments is essential for all M&A professionals.
