When one company acquires another, the purchase price is rarely just a single number. Behind the headline price lies a detailed accounting exercise called Purchase Price Allocation (PPA), which determines how that price is assigned to assets acquired and liabilities assumed.
PPA plays a critical role in post-acquisition financial statements and directly affects depreciation, amortization, and goodwill.
🔍 What Is Purchase Price Allocation?
Purchase Price Allocation (PPA) is the process of allocating the total consideration paid in a business combination to the identifiable assets acquired and liabilities assumed at their fair values on the acquisition date.
Any excess of the purchase price over the net fair value of identifiable assets is recognized as goodwill.
⚖️ Why PPA Is Required
Under IFRS 3 (Business Combinations) and ASC 805, PPA ensures that:
- Acquired assets and liabilities are recorded at fair value
- Intangible assets are properly identified
- Goodwill is not overstated or understated
- Financial statements reflect economic reality
🧾 Key Components of PPA
1. Purchase Consideration
Includes:
- Cash paid
- Fair value of shares issued
- Contingent consideration
- Fair value of assumed debt
2. Identifiable Assets
- Tangible assets (property, equipment, inventory)
- Intangible assets (customer relationships, brands, technology, licenses)
3. Assumed Liabilities
- Loans and borrowings
- Deferred tax liabilities
- Provisions and contingent liabilities
4. Goodwill
Residual amount representing:
- Synergies
- Brand reputation
- Assembled workforce
- Future growth expectations
📊 Simple Example
Company A acquires Company B for $10 million.
Fair value of identifiable net assets:
- Assets: $8 million
- Liabilities: $1 million
- Net assets: $7 million
Goodwill = $10 million – $7 million = $3 million
That $3 million reflects benefits that cannot be separately identified or measured.
📘 Common Intangible Assets Identified in PPA
- Customer contracts and relationships
- Trade names and trademarks
- Patented technology
- Non-compete agreements
- Software and databases
These assets are typically amortized over their useful lives.
⚠️ Why PPA Matters to Financial Performance
- Affects future amortization expense
- Influences profitability post-acquisition
- Impacts impairment testing of goodwill
- Requires significant judgment and valuation expertise
Poor PPA can distort earnings for years after an acquisition.
🧠 Simple Analogy
Think of PPA like buying a business-in-a-box:
You don’t just buy the box—you assign value to what’s inside, and whatever can’t be individually priced becomes goodwill.
🪙 Key Takeaway
Purchase Price Allocation transforms an acquisition price into meaningful accounting data.
It ensures transparency, comparability, and accuracy in post-acquisition financial reporting.
For investors and finance teams alike, understanding PPA is essential to evaluating acquisition performance.