Quick answer
Purchase price allocation (PPA) splits the price paid for a business across the identifiable assets acquired and liabilities taken on, each measured at fair value, with any remainder recorded as goodwill. In Australia it follows AASB 3 Business Combinations, and it usually needs a valuation, especially for intangible assets.
Purchase price allocation (PPA) is the step that follows an acquisition. The buyer has paid a price for a business, and the accounts now have to show what that price bought: which assets, which liabilities and how much goodwill. This guide explains how that works in plain English, and where a purchase price allocation valuation fits.
We are certified registered valuers, not accountants or auditors, so this guide sticks to how the valuation side works. Your finance team and auditor decide the accounting treatment. Our business valuers and plant and equipment valuers give them values they can support.
In this guide
What is purchase price allocation?
When one business buys another, Australian Accounting Standard AASB 3 Business Combinations (the Australian version of IFRS 3) generally requires the buyer to recognise the identifiable assets it has acquired and the liabilities it has taken on, and to measure them at fair value at the acquisition date. The price paid is then compared with those fair values. Anything left over is recorded as goodwill.
That split of the price is the purchase price allocation. It is why a business bought for one figure can end up in the accounts as a mix of property, equipment, customer relationships, brands and goodwill.
A simple worked example
The figures below are round and for illustration only.
| Item | Fair value |
|---|---|
| Property, plant and equipment | $3,000,000 |
| Inventory | $1,000,000 |
| Customer relationships | $2,000,000 |
| Brand | $1,000,000 |
| Liabilities taken on | ($1,000,000) |
| Net identifiable assets | $6,000,000 |
| Price paid for the business | $10,000,000 |
| Goodwill (the remainder) | $4,000,000 |
Illustration only. Real allocations also deal with deferred tax, contingent consideration and other items, which your accountant and auditor will cover.
Which assets are valued in a PPA?
A PPA valuation looks at each class of asset and liability, not just the headline price:
- Tangible assets: property, plant and equipment, and inventory
- Identifiable intangible assets: customer relationships, brands and trade names, technology and software, licences and contracts
- Liabilities taken on: measured at fair value where the standard requires it
- Goodwill: the remainder after everything identifiable has been measured
When is a PPA done, and who needs it?
The acquirer prepares the allocation after the deal completes, as part of its first financial statements that include the acquired business. Its finance team, its auditor and its tax advisers use the valuation.
AASB 3 allows a measurement period of up to one year from the acquisition date. If the values are not final at the first reporting date, the acquirer can use provisional amounts and adjust them as better information arrives within that period.
PPA for accounting and PPA for tax: are they the same?
Not necessarily. The allocation in the accounts follows AASB 3 and fair value. Tax rules, and stamp duty rules in each state, have their own requirements for how a price is split between assets, and the figures can differ. A valuation can support more than one purpose, but the purpose should be stated up front. Ask your accountant which allocations your deal needs.
How a PPA valuation runs
A typical engagement has four steps:
- Confirm the basics: the acquisition date, the assets and the reporting deadline
- Review the documents: the sale agreement, financial information and any earlier valuations
- Value each asset class: using market, cost or income approaches, depending on the asset
- Report: the methods, inputs and assumptions are set out so the allocation can be explained to the auditor
Need a purchase price allocation valuation?
Tell us the acquisition date and the reporting deadline and we will confirm the scope and the fee before any work begins.
Mistakes to avoid
Common mistakes:
- Recording the whole excess as goodwill. The standard asks the buyer to identify intangibles such as customer relationships and brands first.
- Using book values. Fair value can be well above or below the figures in the seller's accounts.
- Starting the valuation late. The measurement period is limited and audit timetables are tight.
- Mixing accounting and tax allocations. They can differ, so keep them separate and say what each is for.
- Treating the first estimate as final. Provisional amounts can be adjusted within the measurement period as better information arrives.
Key terms explained
- Business combination
- A transaction in which a buyer obtains control of a business.
- Fair value
- The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
- Goodwill
- The part of the price that is left after all identifiable assets and liabilities have been measured at fair value.
- Identifiable intangible asset
- An asset without physical form that can be separated from the business or arises from legal rights, such as a customer relationship, a brand or a licence.
- Measurement period
- The period after the acquisition date, up to one year, in which provisional amounts can be adjusted as better information becomes available.
- Acquisition date
- The date the buyer obtains control of the business. The assets and liabilities are measured as at this date.
Need a Purchase price allocation valuation? Talk to a valuer.
Tell us the property, the date you need the value for and what it is for. We will tell you what is needed and what it involves.
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Sources and further reading
- Australian Accounting Standards Board
- PKF: Purchase price allocation and impairment testing in Australian corporate transactions
This is general information, not tax advice. Speak to your accountant or tax adviser about your own position. A valuation sets out market value at a stated date. It does not work out your tax.