What is purchase price allocation?
Purchase price allocation — universally abbreviated PPA — is the accounting exercise an acquirer performs after a deal closes to distribute the purchase price across everything it bought. Each identifiable asset and assumed liability is restated to its fair value at the acquisition date, and whatever price remains unallocated becomes goodwill.
It is the mechanism that turns a single negotiated number — the purchase price — into a set of balance-sheet entries the acquirer will carry forward. Tangible assets are revalued, previously unrecorded intangibles (technology, brands, customer relationships) are recognized, deferred taxes are set up, and the residual premium lands in goodwill.
PPA is required under acquisition accounting whenever one business acquires control of another. It is performed after signing, often with the help of independent valuation specialists, and it shapes the acquirer's future earnings through the amortization and depreciation of the values it assigns.
How a purchase price allocation works
The allocation proceeds from the total consideration down to the residual.
- Establish the consideration. The total fair value paid — cash, stock, assumed debt, and any contingent consideration such as an earnout.
- Fair-value the tangible assets and liabilities. Revalue property, equipment, inventory, and assumed obligations from book value to fair value at the close date.
- Identify and value intangibles. Recognize separately identifiable intangible assets — developed technology, trademarks, customer relationships, order backlog — that may not have been on the target's books.
- Record deferred taxes. Set up deferred tax assets and liabilities for the differences between the new book values and their tax bases.
- Book the residual as goodwill. Whatever consideration exceeds the fair value of identifiable net assets is recorded as goodwill — the plug that makes the allocation balance.
Why the allocation matters
PPA is not a formality — it drives the acquirer's reported earnings for years. Values assigned to finite-lived intangibles are amortized through the income statement, and revalued tangible assets carry new depreciation. Allocating more to amortizable intangibles versus non-amortized goodwill changes the shape of future earnings.
It also has cash consequences through tax. The allocation between asset categories can affect the buyer's tax basis and future deductions, which is why the split is negotiated in some deal structures, not merely computed. A well-run PPA is where the economics of the deal are translated into the figures that everyone — auditors, tax authorities, and the company's own management — will live with afterward.