Purchase price allocation, usually shortened to PPA, is the exercise of assigning the price paid for an acquisition across the identifiable assets and liabilities acquired, each measured at fair value. Whatever cannot be allocated becomes goodwill. It is a mandatory step of business combination accounting, not a valuation formality.
Four steps run in sequence. Identify the assets and liabilities acquired, including intangibles the target never recognised itself, such as brands, customer relationships, technology or order backlog. Measure each one at fair value at the acquisition date. Recognise liabilities the target did not carry, notably contingent liabilities and onerous contracts. Allocate, with the residual becoming goodwill, or badwill if the price falls below net assets.
IFRS 3 grants a measurement period of up to twelve months from the acquisition date to finalise the allocation, precisely because the exercise requires information the buyer rarely holds on day one.
The allocation is not cosmetic: it determines future earnings. Every euro allocated to an amortisable intangible will be charged to profit over its useful life. Every euro left in goodwill is not amortised under IFRS. Two allocations of the same acquisition therefore produce materially different results for years afterwards, which is why auditors examine PPA closely.
The practical constraint is access to reliable data from the acquired entity, quickly, in the buyer's format. That is where consolidating data from multiple ERPs and contract data extraction earn their place: identifying an intangible tied to a customer contract or a lease means reading the contracts, not just the trial balance. See also contract analysis.
