Question

Purchase price allocation (PPA)

When does a purchase price need to be allocated?

Please go in depth with your answer and provide examples

Answer 1

Purchase price allocation (PPA)

A purchase price allocation (PPA) categorizes the purchase price into the various assets and liabilities acquired. A large component of the PPA is the identification and assignment of the fair market value of all tangible and intangible assets and liabilities assumed in a business acquisition as at the date of closing. The difference between the purchase price and the sum of assets and liabilities is then recognized as goodwill. This exercise is a requirement for various widely recognized accounting reporting standards.

PPA is primarily required for accounting purposes, but it also provides a useful analysis of the components that make up goodwill. Prior to this practice, the purchase price was allocated to all of the tangible net assets such as working capital and equipment, with the remainder allocated entirely to goodwill. In a PPA, an analysis and valuation of the identifiable intangible assets must be performed.

Purchase price allocations are performed in conformity with the purchase method of merger and acquisition accounting. In the United States, a second method (known as the pooling or pooling-of-interests method) was discontinued after the issuance of the Statement of Financial Accounting Standards