Purchase Price Allocations: What They Are and When Companies Need Them

In today’s fast-paced business environment, mergers and acquisitions (M&A) remain a cornerstone of corporate growth strategies. However, completing an acquisition involves far more than finalizing a deal and signing a contract. A critical post-transaction requirement is the Purchase Price Allocation (PPA) process; it ensures the acquisition is appropriately recorded and communicated to stakeholders.

What is a Purchase Price Allocation?

PPA is the process of assigning the total consideration paid in an acquisition to the assets acquired and liabilities assumed, based on their fair values at the acquisition date.

In simpler terms, when Company A acquires Company B, the value of the acquired assets is rarely equal to net-book value. A PPA bridges this gap by revaluing assets and liabilities to their fair values, while also recognizing intangible assets that may not be reflected on the seller’s balance sheet, such as:

• Customer relationships
• Trade names and trademarks
• Patents and proprietary technology
• Non-compete agreements

The residual amount after this allocation process becomes Goodwill, which reflects synergies, growth potential, or other strategic benefits expected from the deal.

When Does a Company Need a PPA?

After an Acquisition or Merger
The most common trigger for a PPA is the acquisition of another company. The process typically happens within 12 months of the transaction closing (known as the “measurement period”).

In the Case of Step Acquisitions
If a company increases its stake in a previously partially-owned entity, accounting rules require remeasurement of assets and liabilities—triggering a PPA.

During Internal Reorganizations
In certain jurisdictions, internal transfers of business units between group entities can require a PPA to comply with local GAAP or tax reporting requirements.

For Tax Purposes
For taxable transactions, the tax regulations require a tax PPA to determine post-transaction tax basis, depreciation, amortization, and deductible goodwill amounts.

The PPA Process

• Assess the Acquisition: Review the Stock Purchase Agreement (SPA), establish the fair value as of the acquisition date, and identify the assets and liabilities acquired.
• Engage Valuation Experts: Often critical for accurately valuing real estate, fixed assets, intangible assets, specialized assets, and contingent consideration.
• Prepare Allocation Schedule: Allocate price among tangible assets, intangible assets, liabilities, deferred tax, and compute goodwill.
• Record Results: Reflect fair values and goodwill in post-acquisition consolidated financials. Goodwill is not amortized but tested annually (GAAP) for impairment or tested per IFRS guidelines

Special Considerations in PPAs

Private Company Alternative (ASU 2014-18)

Private companies can elect to skip fair value measurement for certain customer-related intangibles and non-compete agreements, instead of rolling them into goodwill. Goodwill may be amortized over 10 years (or a supportable useful life).

Rollover Equity

When sellers retain a stake in the combined company, the retained interest must also be measured at fair value, adjusting for differences in rights (e.g., non-voting shares or transfer restrictions) compared to common equity.

Contingent Consideration (Earnouts)

If the acquisition includes earnouts, these must be measured at fair value on Day 1—often using probability-weighted models or Monte Carlo simulations.

Conclusion

A well-executed PPA is more than a compliance requirement. It provides stakeholders with a clear picture of the true value of an acquisition. By properly identifying and valuing tangible and intangible assets, recognizing liabilities, and quantifying goodwill, companies ensure transparency in financial reporting while laying a foundation for informed strategic decision-making.

If you need help scoping, valuing, or reporting a PPA, get in touch with a CBIZ professional.