When a deal closes, most of the attention has been on price, structure, and financing. But the work isn’t over — under both ASC 805 and IFRS 3, the buyer must allocate the purchase price across the acquired assets and liabilities at fair value, including identifying and separately valuing intangible assets that may never have appeared on the target’s balance sheet.
This is where purchase price allocation (PPA) becomes more than a compliance exercise. Done well, it directly affects future reported earnings, tax positions, and how cleanly the deal’s economics show up in the combined company’s financial statements.
What Actually Gets Valued
A typical PPA identifies and values several categories of acquired intangible assets separately from goodwill:
- Customer relationships and contracts, typically valued using the Multi-Period Excess Earnings Method (MEEM)
- Trade names and trademarks, typically valued using the relief-from-royalty method
- Developed technology and intellectual property
- Non-compete agreements, where relevant
- Assembled workforce, generally subsumed into goodwill rather than valued separately
Whatever value isn’t allocated to identifiable tangible and intangible assets and liabilities flows to goodwill — which is not amortized but tested annually for impairment.
Why the Allocation Choices Matter
Two acquirers paying the same price for the same target can end up with very different post-close financial statements, depending on how the purchase price is allocated:
- Amortization drag on earnings: Intangible assets with finite useful lives are amortized through the income statement, while goodwill is not — so allocating more value to amortizable intangibles reduces near-term reported earnings, even though cash flow is unaffected.
- Impairment risk: A larger goodwill balance carries more future impairment risk if the business underperforms, which can create volatile, headline-grabbing write-downs.
- Tax implications: In some jurisdictions and deal structures, the allocation affects the tax basis available for future deductions.
The Practical Takeaway
A rigorous PPA isn’t just about satisfying the auditors — it’s a modelling exercise that should be scoped early, ideally before the deal closes, so management understands the earnings and reporting implications of the deal structure they’ve agreed to. Getting the useful life assumptions, discount rates, and contributory asset charges right is what separates a defensible allocation from one that draws auditor pushback a year later.
If you’re heading into a transaction and want to understand how the purchase price allocation will likely shake out before you sign, that’s a conversation worth having early.
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