Purchase Price Allocation (PPA) is an accounting method used during mergers and acquisitions to allocate the total purchase cost among the various assets and liabilities acquired from the target company. Simply put, PPA helps businesses define precisely how their investment breaks down into tangible and intangible assets.
The main objective of conducting a Purchase Price Allocation is to clearly record the fair value of all acquired items on a company's balance sheet. Generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) mandate this process to ensure transparent financial reporting and consistent valuation following business acquisitions.
Typically, a PPA involves several key steps. First, the acquired company's assets (both tangible like machinery, buildings, and equipment, and intangible such as brand value, trademarks, or goodwill) are identified. Second, each asset's fair market value is estimated, and any difference between the total price paid and the sum of individually assessed asset values is recorded as goodwill on the balance sheet.
Accurate Purchase Price Allocation not only ensures compliance with accounting requirements, but also provides clarity about an acquisition's true economic impact—enabling informed decision-making and transparency for both internal management and external stakeholders involved in analyzing company performance.
