Purchase Price Allocation: The Complete PPA Guide

What Is Purchase Price Allocation?

Purchase Price Allocation (PPA) is the process of distributing the total consideration paid in a business combination across the identifiable assets acquired, liabilities assumed, and non-controlling interests — with any residual assigned to goodwill. It is required by IFRS 3 Business Combinations (or ASC 805 under US GAAP) for every business acquisition.

PPA is not an optional accounting exercise. It is a regulatory requirement with material financial consequences. The way the purchase price is allocated determines the acquirer's future amortisation expense, tax benefits, impairment exposure, and the transparency of financial reporting.

The PPA Process: Step by Step

Complete Worked Example

A private equity fund acquires a UK-based B2B SaaS company for £40M in cash.

Step 1: Total consideration

Step 2: Net tangible assets

Step 3-4: Identified intangible assets

Step 5: Goodwill calculation

Goodwill represents 19% of the purchase price — a healthy result indicating thorough asset identification. The goodwill is attributable to assembled workforce (150 employees, estimated replacement cost £3.2M but not separately recognisable), expected synergies from cross-selling to the buyer's existing client base, and the company's market position and going concern value.

Tax Implications

Tax amortisation benefit (TAB)

The identified intangible assets of £30.5M will be amortised over their respective useful lives. In the UK, these amortisation charges are generally tax-deductible for qualifying intangible assets acquired after April 2002.

Deferred Tax on PPA

A frequently overlooked aspect of PPA is the deferred tax liability created by recognising intangible assets at fair value.

When intangible assets are recognised at fair value (greater than their tax base of zero for internally generated assets), a temporary difference arises. Under IAS 12, a deferred tax liability must be recognised for this difference — which reduces the net identifiable assets and correspondingly increases goodwill.

In the worked example above, the £1.8M deferred tax liability represents 25% of the excess of intangible asset fair values over their tax base. This is a circular calculation (the DTL affects goodwill, which could theoretically affect the intangible values), but in practice the iteration converges quickly.

Common PPA Mistakes

Having led or reviewed hundreds of purchase price allocations, I see these errors repeatedly:

1. Under-identifying intangible assets — recognising only 2-3 assets when 8-10 exist, inflating goodwill unnecessarily
2. Starting too late — beginning PPA after deal completion rather than in parallel with due diligence
3. Using company WACC for all assets — different intangible assets carry different risk profiles and should have different discount rates
4. Ignoring the TAB — failing to gross up intangible asset values for the tax amortisation benefit
5. Treating all customer relationships as one asset — contractual and non-contractual relationships have different profiles and should be valued separately
6. Compressing useful lives — choosing shorter lives to reduce balance sheet exposure, at the expense of economic accuracy
7. Forgetting contingent consideration — earn-outs and contingent payments must be included at fair value in the total consideration

The Measurement Period

IFRS 3 allows a measurement period of up to 12 months from the acquisition date to finalise the PPA. During this period, the acquirer can adjust the provisional values assigned to assets and liabilities as new information emerges. Adjustments during the measurement period are made retrospectively — as if the revised values had been recognised on the acquisition date.

After the measurement period closes, adjustments to the PPA are only permitted to correct errors (under IAS 8), not to refine estimates.

Who Performs the PPA?

Purchase price allocations require specialist valuation expertise. The key participants are:

• The acquirer's finance team — provides the financial data, transaction details, and business context
• External valuation specialists — typically Big Four firms or specialist valuation practices; they perform the technical valuation work
• The acquirer's auditors — review the PPA and may challenge assumptions, methods, and conclusions
• Tax advisors — advise on deal structuring to maximise tax amortisation benefits
• Legal counsel — advises on IP ownership, contract transferability, and regulatory asset status

For mid-market transactions (£10M-£100M), the PPA typically costs £30K-£100K — a modest investment relative to the potential tax benefits of thorough asset identification. For larger transactions, costs scale but so do the benefits.

PPA Best Practice

Resources

• Model your PPA — Use the Opagio Calculator to model intangible asset valuations across RFR, MPEEM, cost, and income approaches
• Identify assets systematically — The Intangible Asset Questionnaire maps all asset categories across the five IFRS 3 classes
• Learn the methods — The Valuation Methods programme covers each method in depth with worked examples
• Understand goodwill — Read our guide on goodwill vs identifiable intangible assets
• Due diligence — Our intangible asset due diligence guide covers the pre-PPA assessment