What is purchase price allocation (PPA)?

Full Explanation

PPA is the process of allocating the total price paid in a business acquisition across the acquired company's identifiable tangible assets, intangible assets, liabilities, and goodwill. Purchase Price Allocation is required under IFRS 3 and ASC 805 whenever one company acquires another. The acquirer must identify and measure at fair value all assets acquired and liabilities assumed, including intangible assets that may not have been recognised on the target's balance sheet. Common intangibles identified in PPA include customer relationships, brand names, technology, in-process R&D, favourable contracts, and order backlog. Each is valued using the most appropriate method (RFR for brands, MPEEM for customer relationships, Cost Approach for workforce). The difference between the total consideration paid and the net fair value of identifiable assets and liabilities is recorded as goodwill. PPA must be completed within 12 months of the acquisition date (the measurement period). Getting PPA right matters because the intangible asset values directly affect ongoing amortisation charges, impairment testing, and ultimately reported earnings. Goodwill, which arises only through acquisition, represents the residual value after all identifiable assets and liabilities have been measured at fair value. Under IFRS, goodwill is subject to annual impairment testing rather than systematic amortisation, which means it can remain on the balance sheet indefinitely until an impairment event occurs. Under US GAAP (post-ASU 2017-04), a simplified one-step impairment test compares the carrying amount of the reporting unit to its fair value. Understanding these differences is essential for companies operating across jurisdictions or considering cross-border transactions.

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