Brief Definition
Purchase price allocation (PPA) is the process of distributing the purchase price of an acquired company among its identifiable assets and liabilities based on their fair values at the acquisition date.
Further Explanation
Purchase price allocation (PPA) is the process of distributing the purchase price of an acquired company among its identifiable assets and liabilities based on their fair values at the acquisition date. This accounting exercise ensures that the acquiring company accurately reflects the fair values of the acquired assets and liabilities on its balance sheet, and any remaining amount is recorded as goodwill.
Example:
Company A acquires Company B for $5 million. The fair value of Company B’s identifiable assets is $4 million, and the fair value of its liabilities is $1 million. The net identifiable assets’ fair value is $3 million ($4 million – $1 million). The purchase price allocation would distribute the $5 million purchase price as follows: $4 million to the identifiable assets, $1 million to the liabilities, and the remaining $2 million ($5 million – $3 million) as goodwill.