What is Purchase Price Allocation (PPA) and when is it required?

Purchase Price Allocation (PPA) is an accounting procedure required under IFRS 3 following a merger or acquisition. It involves allocating the purchase price of an acquired business across its identifiable tangible and intangible assets (like brands or customer lists) at their fair values, with any residual amount recorded as Goodwill.

Can my regular accountant perform an IFRS valuation?

Generally, no. IFRS valuations (especially for PPA, impairment testing, or complex financial instruments) require advanced financial modeling skills and adherence to International Valuation Standards (IVS). External auditors typically require these valuations to be performed by independent, certified valuation specialists to ensure objectivity and compliance.

How does SARAS oversee these valuations?

The Service for Accounting, Reporting and Auditing Supervision (SARAS) in Georgia regulates the quality of financial reporting and the work of auditors. If an external auditor signs off on a financial statement containing a flawed IFRS valuation, SARAS can penalize the auditor and force the company to restate its financials.

IFRS/GAAP Business Valuation in Georgia | Legal.ge

Q: Are IFRS valuations mandatory for all companies in Georgia?

No, they are not mandatory for every company. According to the Georgian Law on Accounting, Reporting and Auditing, full IFRS compliance is mandatory for Public Interest Entities (PIEs), as well as Category 1 and Category 2 enterprises. Smaller entities may use IFRS for SMEs or local accounting standards, which have less stringent valuation requirements.

What is Business Valuation for Financial Reporting (IFRS/GAAP)?

Business and asset valuation for financial reporting purposes is a highly regulated, precise, and specialized process aimed at determining the fair value of a company's assets and liabilities in strict compliance with International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). Unlike other types of valuations (such as those for M&A or tax purposes), this process is distinguished by the fact that its results are subject to rigorous scrutiny by external auditors (including "Big Four" firms) and regulatory bodies. In Georgia, as corporate transparency standards rapidly align with European directives, the adoption of IFRS has become mandatory for large and medium-sized enterprises. This valuation ensures that the company's balance sheet reflects the true economic reality of the business, preventing any artificial inflation or deflation of asset values. This process is critically important for securing the trust of shareholders, creditors, investors, and state institutions, and for demonstrating financial stability. It requires the appraiser to possess not only advanced financial modeling skills but also a profound understanding of complex accounting standards.

What Does This Valuation Service Cover?

Valuation for financial reporting encompasses a range of specific procedures and categories defined by IFRS standards. The service comprehensively covers the following areas:

Purchase Price Allocation (PPA, IFRS 3): When one company acquires another, IFRS 3 requires that the purchase consideration be allocated across all acquired identifiable tangible and intangible assets (such as brand, customer base, patents, technologies) at their fair value. Any difference between the purchase price and the fair value of the net assets is recorded as Goodwill.
Impairment Testing (IAS 36): Companies are required, at least annually (or whenever there is an indicator of impairment), to test goodwill and other long-lived assets. This service involves calculating the recoverable amount (Value in Use or Fair Value less costs to sell) of an asset or Cash-Generating Unit (CGU) to determine if its carrying amount exceeds its true economic value.
Fair Value Measurement (IFRS 13): This standard is the cornerstone for financial reporting valuations. The service includes determining the fair value of investment properties (IAS 40), financial instruments (IFRS 9), and biological assets (IAS 41) from the perspective of market participants, adhering strictly to the fair value hierarchy (Levels 1, 2, 3).
Share-based Payments (IFRS 2): When a company compensates its employees or management with stock options, it is necessary to calculate the fair value of these options on the grant date so that they can be correctly recognized as an expense. Complex mathematical models, such as Black-Scholes or Binomial models, are used for this purpose.
Identification and Valuation of Intangible Assets (IAS 38): Determining the market value and estimating the useful economic life of internally generated or acquired intangible assets (e.g., licenses, proprietary software, trademarks).

When is an IFRS/GAAP Valuation Necessary?

Valuation for financial reporting purposes becomes mandatory at crucial and specific stages of a company's development. The most common real-world scenarios include:

Post-Merger or Acquisition Period: Following the closing of an M&A deal, the acquiring company must complete the PPA process within one year to correctly reflect the assets of the new subsidiary in the consolidated financial statements.
Annual Financial Audit Process: At the end of the financial year, when the external auditor demands evidence that the goodwill or specific assets on the company's balance sheet are not impaired. This is particularly relevant during economic downturns or negative market shifts.
First-time Adoption of IFRS (IFRS 1): When a Georgian company grows and is legally required to transition to international standards, it must revalue its opening balance sheet.
Revaluation of Investment Property: Real estate development companies and investment funds are required to periodically (usually annually) revalue their investment properties to reflect increases or decreases in market value under IAS 40.
Initial Public Offering (IPO): When a company plans to list its shares publicly, its financial statements must be flawless and fully compliant with global standards to attract international investors.

Georgian Legal and Regulatory Framework

In Georgia, valuation for financial reporting is subject to a strict legal and regulatory framework. The primary legislative act is the Law of Georgia on Accounting, Reporting and Auditing. According to this law, Public Interest Entities (PIEs), as well as Category 1 and Category 2 enterprises, are obligated to prepare their financial statements in full compliance with International Financial Reporting Standards (IFRS). This process is overseen by the Service for Accounting, Reporting and Auditing Supervision (SARAS). Furthermore, the Tax Code of Georgia plays a significant role, as differences between the fair value determined under IFRS and the carrying amount for tax purposes create deferred tax assets or liabilities (under IAS 12), which must be precisely calculated. Matters of company capital and corporate structure are regulated by the Law on Entrepreneurs. Appraisers are also obligated to follow the International Valuation Standards (IVS) to ensure that the market value defined by IVS perfectly aligns with the "fair value" concept of IFRS 13.

The Valuation Process and Auditor Interaction

The process of valuation for financial reporting is highly structured and exceptionally detailed:

Scoping and Data Collection: The appraiser analyzes the specific IFRS standard (e.g., IFRS 3 or IAS 36) triggering the valuation and gathers the company's historical financial data, management forecasts, and legal documentation.
Macroeconomic and Industry Analysis: The expert researches the Georgian economic environment, industry trends, and risks, which are essential for accurately calculating the discount rate (WACC).
Financial Modeling: Detailed models are built using the Income, Market, or Cost approaches. For impairment testing, the Discounted Cash Flow (DCF) method is predominantly utilized.
Auditor Reconciliation: This is the most unique aspect of this service. The appraiser communicates directly with the client's external auditor (Big 4 or otherwise) to pre-agree on the methodology and assumptions (such as growth rates and WACC) to prevent disputes during the final audit phase.
Final Report Preparation: A comprehensive, auditor-ready report is issued, transparently describing every calculation, assumption, and source of information.

Why Choose a Specialist on Legal.ge?

Business valuation for IFRS and GAAP purposes is a task of the highest complexity, requiring appraisers who "speak the language of auditors." An unqualified valuation will undoubtedly be rejected by external auditors, leading to delays in publishing financial statements, regulatory fines, and a loss of investor confidence. Legal.ge is a platform that connects you with verified, certified appraisers and financial advisory firms operating in Georgia, who have proven experience in successfully collaborating with "Big Four" auditors and ensuring compliance with SARAS requirements. On our platform, you can select a specialist based on your industry and specific needs. Find a professional on Legal.ge to ensure the accuracy, transparency, and full international compliance of your company's financial reporting.