Purchase price allocation

Purchase price allocation (PPA) is the accounting process by which an acquirer assigns the price paid in a business combination to the identifiable assets acquired and liabilities assumed, measured at fair value, with any excess recorded as goodwill. It is required under the acquisition method of ASC 805 (US GAAP) and IFRS 3.

Steps

1. Determine the consideration transferred — cash, stock and the fair value of any contingent consideration such as an earnout.
2. Identify and fair-value the assets and liabilities, including assets the target never recorded on its own balance sheet — particularly intangible assets such as:
   • customer relationships and contracts,
   • trade names and brands,
   • developed technology, patents and other intellectual property,
   • non-compete agreements.
3. Record the residual as goodwill — the consideration left over after allocating to identifiable net assets.

Why it matters

• Earnings impact: identified finite-lived intangibles are amortised, creating ongoing non-cash expense; the residual goodwill is not amortised but is tested for impairment. The split between amortising intangibles and non-amortising goodwill therefore affects future reported earnings.
• Tax: in an asset deal (or a stock deal with a step-up election), the allocation also affects the tax basis of assets and future deductions.
• Transparency: PPA disclosures reveal what a buyer believed it was paying for.

Measurement period

If the allocation is not complete when financial statements are first issued, IFRS and US GAAP allow a measurement period of up to one year from the acquisition date to finalise provisional amounts as new information about facts existing at the acquisition date emerges.