An In-Depth Guide to Purchase Price Allocations

By Dan Eyman

In the realm of mergers and acquisitions (M&A), understanding and correctly implementing Purchase Price Allocations (PPA) is crucial for both the acquiring and acquired companies. The allocation process involves determining the fair value of the acquired assets and liabilities, which significantly impacts financial reporting and tax obligations. This guide delves into the nuances of Purchase Price Allocations, providing essential insights for businesses navigating this complex landscape.

What is Purchase Price Allocation?

Purchase Price Allocation (PPA) is the process of assigning the purchase price of an acquired company to its identifiable assets and liabilities at their fair values. This allocation is a mandatory accounting practice under generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The goal is to accurately reflect the economic value of the transaction in the financial statements of the acquiring company.

The Importance of Purchase Price Allocation

Properly allocating the purchase price is vital for several reasons:

1. Financial Reporting

Accurate PPA ensures that the financial statements of the acquiring company reflect the true value of the acquired assets and liabilities, providing transparency and reliability for investors and stakeholders.

2. Tax Implications

The allocation impacts the tax basis of the acquired assets, influencing future depreciation and amortization expenses. A precise PPA can optimize the tax benefits for the acquiring company.

3. Goodwill Calculation

PPA is crucial in determining the amount of goodwill arising from the acquisition. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets and liabilities.

Key Components of Purchase Price Allocation

To effectively perform a PPA, it is essential to understand its key components:

Identifiable Assets and Liabilities

The first step involves identifying all the tangible and intangible assets and liabilities acquired in the transaction. This includes everything from physical assets like property and equipment to intangible assets like patents, trademarks, and customer relationships.

Fair Value Determination

Once the assets and liabilities are identified, their fair values must be determined. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.


After allocating the purchase price to identifiable assets and liabilities, any remaining amount is recorded as goodwill. Goodwill is tested annually for impairment to ensure it reflects the current market value.

Steps in the Purchase Price Allocation Process

The PPA process involves several key steps:

1. Identify the Acquired Assets and Liabilities

The first step is to compile a comprehensive list of all assets and liabilities acquired in the transaction.

2. Determine the Fair Value of Identifiable Assets and Liabilities

Valuation experts typically conduct this step, using various methods to determine the fair value of tangible and intangible assets and liabilities.

3. Allocate the Purchase Price

The purchase price is allocated to the identified assets and liabilities based on their fair values. Any remaining amount is recorded as goodwill.

4. Document the Allocation

It is crucial to maintain thorough documentation of the PPA process, including the methodologies and assumptions used in the fair value determination.

Challenges in Purchase Price Allocation

Several challenges can arise during the PPA process:

1. Valuation of Intangible Assets

Determining the fair value of intangible assets such as patents, trademarks, and customer relationships can be complex and requires specialized expertise.

2. Regulatory Compliance

Ensuring compliance with relevant accounting standards (GAAP or IFRS) and regulatory requirements is critical. Any discrepancies can lead to significant financial and legal repercussions.

3. Integration of Financial Systems

Integrating the acquired company’s financial systems and data into the acquirer’s system can be a complex and time-consuming task, impacting the accuracy of the PPA.


Purchase Price Allocation is a critical process in mergers and acquisitions, providing a clear and accurate reflection of the economic value of the transaction. By understanding the key components and steps involved in PPA, businesses can ensure compliance with accounting standards, optimize tax benefits, and maintain transparency in financial reporting. Navigating the complexities of PPA requires careful planning and the expertise of valuation professionals to achieve a fair and accurate allocation of the purchase price.


Let’s talk

Schedule an intro call to learn about why MeldVal is important for your business. Or have any questions? We’re here to help.

Contact us