Goodwill and Purchase Price Allocation Explained

When a company acquires another business, the price paid rarely matches the target’s balance-sheet value. Purchase price allocation, or PPA, explains the gap by revaluing acquired assets and liabilities, recognizing new intangible assets, and recording the remainder as goodwill. You need to understand this process to build merger models and explain how a deal affects earnings.

Author: Michael Harris Updated 5 min read

What purchase price allocation does

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

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