Goodwill and Purchase Price Allocation Explained

When a company acquires another business, the price paid rarely equals the target’s balance-sheet value. Purchase price allocation, or PPA, explains that difference by revaluing acquired assets and liabilities, recognizing new intangible assets, and recording any remaining amount as goodwill. Understanding this process is essential for building merger models and explaining a deal’s impact on earnings.

Author: Michael Harris Updated 4 min read

What purchase price allocation does

Purchase price allocation is the accounting process used after an acquisition to assign the purchase consideration to the target’s identifiable assets and liabilities at fair value. Book value reflects historical accounting, while fair value estimates what those items are worth at the acquisition date.

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