Purchase Price Allocation

Purchase price allocation, or PPA, is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transaction.

In the United States, the process of conducting a PPA is typically conducted in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 141 (revised 2007) “Business Combinations” (“SFAS 141r”) and SFAS 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). Effective for financial statements issued for interim and annual periods ending after September 15, 2009, the FASB "Accounting Standards Codification" ("ASC") reorganizes the FASB statements and represents a single authoritative source of U.S. accounting and reporting standards for nongovernmental entities. The set of guidelines prescribed by SFAS 141r are generally found in ASC Topic 805. Outside the United States, the International Accounting Standards Board governs the process through the issuance of IFRS 3.

Purchase price allocations are performed in conformity with the purchase method of merger and acquisition accounting. In the United States, a second method (known as the pooling or pooling-of-interests method) was discontinued after the issuance of the Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”) and SFAS 142.

Read more about Purchase Price Allocation:  Example

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Purchase Price Allocation - Example
... After much negotiation, a purchase price of $30B is agreed upon by both sides ... to determine their Fair Market Value ("FMV") -- the price a willing buyer would pay, and a willing seller would receive, through an arm's length ... is $6B in goodwill acquired through the transaction—the excess of the purchase price paid over the FMV of the net identifiable assets acquired ...

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