Purchase price allocation

The purchase price allocation is where the accounting for an acquisition is decided: how much becomes amortising intangibles, how much stays in goodwill, and what happens to future earnings. This guide works through a full PPA, from book values to goodwill, and explains how each step is valued.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

A purchase price allocation (PPA) assigns the price paid in a business combination to the identifiable assets acquired and liabilities assumed at their fair values, with the remainder recognised as goodwill. It usually involves identifying intangible assets the acquiree never recognised, such as customer relationships and brands, remeasuring tangible assets and liabilities to fair value, and recognising deferred tax on the fair value adjustments. In this guide's example, a 650 purchase of 80% of a competitor produces goodwill of 186.

At a glance

Purpose
Allocate the price to fair values
New intangibles
Customer relationships, brands, technology
Remeasure
PPE, inventory, contingent liabilities
Deferred tax
On the fair value adjustments
Remainder
Goodwill
Excel
Purchase price allocation model
Purchase price allocationPurpose: Allocate the price to fair values; New intangibles: Customer relationships, brands, technology; Remeasure: PPE, inventory, contingent liabilities; Deferred tax: On the fair value adjustments; Remainder: Goodwill; Excel: Purchase price allocation model.KEY FACTS AT A GLANCEPurchase price allocationPurposeAllocate the price tofair valuesNew intangiblesCustomer relationships,brands, technologyRemeasurePPE, inventory,contingent liabilitiesDeferred taxOn the fair valueadjustmentsRemainderGoodwillExcelPurchase price allocationmodelTax BakersPurchase price allocationPurpose: Allocate the price to fair values; New intangibles: Customer relationships, brands, technology; Remeasure: PPE, inventory, contingent liabilities; Deferred tax: On the fair value adjustments; Remainder: Goodwill; Excel: Purchase price allocation model.KEY FACTS AT A GLANCEPurchase price allocationPurposeAllocate the price to fair valuesNew intangiblesCustomer relationships, brands, technologyRemeasurePPE, inventory, contingent liabilitiesDeferred taxOn the fair value adjustmentsRemainderGoodwillExcelPurchase price allocation modelTax Bakers
Key facts at a glance, as set out in this guide.

A worked purchase price allocation example

A company buys 80% of a competitor for 600 in cash plus contingent consideration with a fair value of 50, a total of 650. The competitor's book net assets are 400. The tax rate is 25%, and the non-controlling interest is measured at its proportionate share.

CU millionBook valueFair value adjustmentFair value
Property, plant and equipment25060310
Customer relationships0110110
Brand08080
Inventories9010100
Receivables and cash1600160
Payables and borrowings(100)0(100)
Contingent liability for a lawsuit0(20)(20)
Deferred tax on adjustments: 240 x 25%(60)(60)
Identifiable net assets400180580
From consideration to goodwill (CU million)From consideration to goodwill (CU million)650Consideration+116NCI-400Book netassets-240Fair valueuplifts+60Deferredtax186Goodwill
Goodwill is what remains after the net assets are valued.

Goodwill = 650 + non-controlling interest of 116 (20% of 580) - 580 = 186, about 29% of the price paid.

How are intangible assets identified?

An intangible asset is recognised separately from goodwill if it arises from contractual or legal rights or is separable. Common ones are customer contracts and relationships, order backlogs, brands and trade names, technology and software, licences, and non-compete agreements. An assembled workforce is not identifiable and stays in goodwill. Valuers typically use income approaches: the multi-period excess earnings method for customer relationships, relief from royalty for brands, and cost or relief from royalty for technology.

How are other assets and liabilities remeasured?

  • Property, plant and equipment: market value, or depreciated replacement cost for specialised assets.
  • Inventories: finished goods at selling price less costs to sell and a reasonable profit for the selling effort, which raises cost of sales when the inventory is sold after the acquisition.
  • Receivables: fair value, which reflects expected credit losses; no separate allowance is carried over.
  • Contingent liabilities: recognised at fair value if they are present obligations, even if an outflow is not probable.

Why is deferred tax recognised?

Because the fair value adjustments increase carrying amounts while tax bases usually stay the same, creating taxable temporary differences. In an asset purchase that steps up the tax bases, as some jurisdictions allow, little or no deferred tax arises. The deferred tax liability reduces net assets and so increases goodwill. No deferred tax is recognised on goodwill itself. See temporary differences.

Who performs the PPA and how long does it take?

Usually an independent valuer working with the acquirer's finance team, starting before completion and finishing within the 12-month measurement period. Provisional amounts are used at the first reporting date and adjusted retrospectively as valuations are finalised.

What if net assets exceed the price?

That is a bargain purchase. The acquirer first reassesses whether it has identified all assets and liabilities correctly and reviews the measurement of everything, including the consideration. Any remaining excess is recognised as a gain in profit or loss on the acquisition date. Bargain purchases usually arise in forced sales, such as a seller in financial distress or a disposal required by a competition authority, and are rare in practice.

What happens to earnings afterwards?

Customer relationships of 110 amortised over 10 years add 11 a year to expenses; the PPE uplift adds depreciation; the inventory uplift of 10 hits cost of sales as the stock is sold; the brand, if indefinite-lived, is tested annually. These charges reduce reported profit, which is why many companies present adjusted measures excluding acquisition amortisation. The Purchase price allocation model (Excel) runs this allocation with your own figures.

Where to go next

See IFRS 3 explained and the two methods for measuring non-controlling interests.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

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Questions people ask

What is a purchase price allocation?

The process of assigning the price paid in a business combination to the identifiable assets and liabilities at fair value, with the remainder recognised as goodwill.

Which intangible assets are recognised in a PPA?

Those arising from contractual or legal rights or that are separable, such as customer relationships, brands, technology and order backlogs.

Why is deferred tax recognised in a purchase price allocation?

Fair value adjustments increase carrying amounts without changing tax bases, creating taxable temporary differences.

Is an assembled workforce recognised as an intangible asset?

No. It is not identifiable, so its value is part of goodwill.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 3 Business Combinations

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 3IFRS 3 business combinations explainedIFRS 3Measuring non-controlling interest: full vs partial goodwillIAS 36Goodwill impairment testing

More in IFRS 3

TopicAll 4 guides in IFRS 3

This guide is general information. It is not tax or legal advice for your situation.