ASC 805 compliant allocations that satisfy auditors and maximize tax benefits.
Purchase Price Allocation (PPA) is the process of assigning the purchase price paid in a business combination to the acquired assets and assumed liabilities at their fair values. Under ASC 805 (Business Combinations), acquirers must report the fair values of all acquired tangible and intangible assets on their opening balance sheet.
Intangible assets—customer relationships, technology, trade names, non-compete agreements—often represent a significant portion of the purchase price. These must be separately identified and valued, with the residual becoming goodwill.
The implications extend beyond accounting. PPA affects future earnings (through amortization), tax positions (338(h)(10) elections), earnout calculations, and potential goodwill impairment testing.
Required for any business combination under GAAP
Any acquisition—whether asset or stock deal—requires PPA to properly record acquired assets and liabilities.
Mergers combining two entities require PPA from the perspective of the accounting acquirer.
Earnouts and milestone payments must be valued at fair value and recorded as part of the purchase price.
Section 338(h)(10) elections create a "deemed asset acquisition" requiring PPA for tax purposes.
Portfolio company acquisitions require PPA for consolidated financial reporting to LPs.
Up to one year post-close, adjustments to initial PPA may be required as new information emerges.
Efficient delivery without sacrificing rigor
We review the purchase agreement, due diligence materials, and deal rationale to understand what's being acquired and why.
We identify all tangible and intangible assets acquired, including those not previously recorded on the target's books.
We apply appropriate methodologies for each asset class—multi-period excess earnings, relief from royalty, cost approach, and others.
We determine appropriate useful lives for each intangible asset based on legal, contractual, and economic factors.
We provide comprehensive documentation supporting each valuation conclusion, ready for auditor review.
We work directly with your auditors to address questions and ensure smooth sign-off.
Intangible assets with finite lives are amortized, reducing GAAP earnings. Customer relationships might amortize over 10-15 years; technology over 3-7 years. This affects non-GAAP adjustments many companies make.
Book PPA follows ASC 805 for GAAP reporting. Tax PPA follows IRS rules and affects basis for depreciation/amortization deductions. The two often differ significantly.
Goodwill is the residual—the excess of purchase price over the fair value of net identifiable assets. It's not amortized but tested annually for impairment under ASC 350.
Ideally, engage us during due diligence or at signing. This allows time to gather information and coordinate with auditors before close, avoiding last-minute pressure.
Typically using the multi-period excess earnings method (MPEEM), which isolates cash flows attributable to customer relationships after contributory asset charges.
Earnouts are fair valued at acquisition using probability-weighted scenarios. They're remeasured each period, with changes flowing through earnings (not goodwill).
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