What Does Purchase Price Allocation (PPA) Mean?
A purchase price allocation (PPA) categorizes the purchase price into the various assets and liabilities acquired. A large component of the PPA is the identification and assignment of the fair market value of all tangible and intangible assets and liabilities assumed in a business acquisition as at the date of closing. The difference between the purchase price and the sum of assets and liabilities is then recognized as goodwill. This exercise is a requirement for various widely recognized accounting reporting standards.
Divestopedia Explains Purchase Price Allocation (PPA)
A PPA is primarily required for accounting purposes, but it also provides a useful analysis of the components that make up goodwill. Prior to this practice, the purchase price was allocated to all of the tangible net assets such as working capital and equipment, with the remainder allocated entirely to goodwill. In a PPA, an analysis and valuation of the identifiable intangible assets must be performed. Examples of identifiable intangibles may include customer/supplier relationships, brand name, patents and trademarks.
Although a PPA is performed post-acquisition primarily as an accounting exercise, it could be used prior to selling a business that does not have significant tangible net assets. The analysis would be presented to the buyer in order to justify a significant goodwill balance by valuing all of the identifiable intangible assets within the business.