Important Components of Purchase Price Allocation

In the field of acquisition accounting, purchase price allocation (PPA) is an operation in which an acquirer allocates the purchase price into the liabilities and assets of the target organization that is acquired in the complete transaction. Purchase price allocation is a crucial step in accounting reporting once the merger or acquisition gets fulfilled. The present accepted accounting standards, such as the International Financial Reporting Standards (IFRS), makes it mandatory to employ the purchase price allocation method for any type of business deal, that include both acquisitions and mergers. Another point worth mentioning is that the previous accounting standards needed purchase price allocation only in acquisition deals. 

Here are the 3 major components of PPA:

• Net-identifiable assets

Net identifiable assets mean the total value of assets of an acquired company, that is less the total amount of its liabilities. Remember that the “identifiable assets” are those with a particular value at a given point of time, and whose advantages can be recognized and quantified with reasons.

• Write-up

A write-up is an adjusting increment to the book value of an asset. It is made if the asset’s carrying value is smaller than its fair market value.

• Goodwill

Basically, goodwill refers to the amount paid in excess of the target company’s net value of its assets minus its liabilities. 

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