Purchase Price Allocation (PPA)
The process of assigning an acquisition price to the identifiable assets and liabilities of an acquired company at fair value, with any excess recorded as goodwill.
What is Purchase Price Allocation?
Purchase price allocation (PPA) is the accounting process required under GAAP (ASC 805) and IFRS (IFRS 3) when one company acquires another in a business combination. The acquirer must assign the total acquisition price to each identifiable asset acquired and liability assumed at its fair value on the acquisition date. Identifiable assets commonly include tangible assets (property, equipment, inventory), financial assets, and intangible assets such as customer relationships, patents, trademarks, and technology—even if these were not on the acquired company's books before. The difference between the total purchase price and the net fair value of all identifiable assets and liabilities is recognized as goodwill. PPA affects the acquirer's future earnings because amortizable intangibles are expensed over their useful lives, while goodwill is tested annually for impairment.
Example
A tech company acquires a startup for $500M. A third-party valuation assigns: net tangible assets $50M, customer relationships $120M (amortized over 8 years), developed technology $80M (amortized over 5 years), trade name $30M (indefinite life). The remaining $220M is recognized as goodwill. The customer relationship and technology amortization will reduce future GAAP net income by roughly $31M per year.