How do I allocate purchase price across acquired assets and liabilities?

Question

AcadiFi · Accepted Answer

Purchase price allocation (PPA) distributes the consideration across identifiable assets and liabilities at **fair value** on acquisition date, with the residual becoming goodwill.

**Hierarchy of allocation:**
1. Tangible assets — PP&E stepped up to fair value (creates higher future depreciation)
2. Identifiable intangibles — customer relationships, technology, trademarks, backlog, non-compete agreements
3. Liabilities assumed — at fair value including contingent liabilities if probable and measurable
4. Deferred tax adjustment — DTL created on taxable temporary differences from step-ups
5. Non-controlling interest — full fair value or proportionate share (IFRS option)
6. Residual → Goodwill

**Example — Northshore Foods buys Lakeridge Snacks for $340M:**
| Item | Book Value | Fair Value |
|---|---|---|
| Inventory | $18M | $22M |
| PP&E | $95M | $130M |
| Trademark | $0 | $40M |
| Customer list | $0 | $28M |
| Debt | ($60M) | ($62M) |
| DTL on step-ups | $0 | ($30M) |

Identifiable net = $128M. Goodwill = $340M - $128M = $212M.

**Key rules:** Acquired IPR&D capitalized as indefinite-lived intangible until project completes. Contingent liabilities recognized if fair value can be reliably measured (IFRS) or if probable (US GAAP). Operating lease ROU assets and liabilities recognized separately at fair value.

How do I allocate purchase price across acquired assets and liabilities?

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