A Modern Guide to Purchase Price Allocation

Introduction 

Purchase Price Allocation (“PPA”) has evolved from a compliance exercise to a strategic financial reporting decision. Recent SEC comment letter trends, paired with heightened IRS scrutiny of IRC Section 197 classifications, mean that methodology choices made at acquisition can influence financial outcomes years into the future. Understanding these implications helps companies avoid costly missteps and ensure that acquisition reporting supports long term business goals. 

This whitepaper provides a straightforward explanation of PPA, why it matters, and how it is performed. 

Understanding Purchase Price Allocations 

A Purchase Price Allocation is the process of assigning a portion of the total purchase price of an acquired business to its identifiable assets and liabilities. The allocation is performed as of the transaction date, the point in time when control  is changed. While straightforward in concept, execution requires navigating technical judgment calls that can materially affect both financial reporting and tax outcomes. 

Why Purchase Price Allocations Demand Strategic Attention 

​​​ When companies treat PPAs as routine compliance rather than strategic decision-making, we consistently see predictable patterns of risk materialize. Material post-closing adjustments trigger restatements that damage credibility with investors and lenders. SEC comment letters questioning methodology delay filings and create regulatory exposure that extends far beyond the original transaction timeline. IRS examinations disallow amortization deductions years after acquisition - when documentation has grown stale and deal teams have moved on to other roles - resulting in unexpected tax liabilities that could have been avoided with defensible methodology at closing. 

Poorly supported allocations complicate annual audits, creating recurring friction with auditors who question assumptions that can no longer be reconstructed. Sophisticated investors scrutinize acquisition accounting in subsequent transactions, and weak PPA work from prior deals becomes a liability in future M&A discussions. Perhaps most costly are the opportunity costs: overly conservative allocations to goodwill that forgo legitimate tax benefits because internal teams lack the expertise to identify and defend more favorable classifications. 

These consequences aren't theoretical. In our experience across hundreds of PPA engagements, the firms that avoid these problems share a common approach: they recognize early that PPA methodology choices have lasting implications and engage specialists when technical decisions could materially affect financial or tax outcomes. 

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​​​How we Approach Purchase Price Allocation 

1. Determinethe Purchase Price 

The total consideration paid by the buyer, including cash, stock, assumed liabilities, and contingent consideration measured at fair value as of the transaction date, must be identified. 

2. IdentifyAcquired Assets and Liabilities 

The acquired company’s assets and liabilities must be categorized into tangible (physical assets) and intangible (non physical assets). 

3. Measure Fair Value

Each asset and liability is assigned a fair value based on market data, valuation models, and expert analysis in accordance with ASC 820, which outlines the framework for measuring fair value. 

4. Allocate the Purchase Price

The purchase price is allocated based on the fair values of the identified assets and liabilities. 

5. DetermineGoodwill 

If the purchase price exceeds the fair value of net assets, the remaining value is recorded as goodwill, representing synergies, brand reputation, or customer relationships that are not individually measurable. 

Commonly Valued Assets in PPA 

Tangible Assets: Buildings, equipment, land, inventory
Intangible Assets: Trademarks, patents, customer relationships, non-compete agreements
Liabilities: Seller notes, earnouts, Debt obligations, lease commitments, 
Goodwill: Excess of purchase price over the fair value of net identifiable assets 

Challenges in PPA 

Instead of emphasizing general valuation complexity, it is more useful to outline the specific technical decisions that determine when expert support is needed. These decisions often influence audit outcomes, tax positions, and regulatory scrutiny. 

Examples include: 

• Evaluating whether acquired technology should be valued separately or embedded within customer relationships 

• Determining when an assembled workforce qualifies for separate intangible recognition under ASC 805-20 

• Navigating IRC Section 197 classification disputes that may trigger IRS examination 

• Assessing whether contingent consideration structures require specialized valuation techniques 

• Identifying situations where rapidly changing market inputs create material volatility in fair value conclusions 

Technical decisions like these highlight when professional guidance helps ensure accuracy and reduces financial reporting risk. 

Conclusion 

​​​ Purchase Price Allocation has evolved from a post-closing accounting exercise to a strategic financial decision with implications that extend years beyond the transaction date. In today's environment of heightened regulatory scrutiny, sophisticated investor analysis, and aggressive IRS examination practices, methodology choices made at acquisition directly impact financial reporting flexibility, tax positions, and regulatory exposure. 

The frameworks outlined here help CFOs, transaction advisors, and board members identify when PPA deserves strategic attention - and when specialized valuation support adds genuine protective value rather than just process compliance. The most defensible allocations are those designed with foresight: built on rigorous methodology, documented contemporaneously, and crafted to withstand the scrutiny that sophisticated transactions inevitably face. 

When to Engage a Valuation Specialist 

Engaging a valuation advisor early in the deal cycle helps ensure the correct identification and classification of assets, reduces the risk of post-acquisition adjustments, and streamlines audit review. Optimal timing is typically:

• During preliminary diligence when deal structure is being finalized 

• Immediately after closing when initial fair value assessments begin 

• When unique assets or complex structures require specialized modeling 

• When IRC Section 197 classifications may affect long term tax positions 

Our valuation team recently assisted a client in resolving an IRS challenge tied to intangible asset classifications, ultimately preserving multiple millions in amortizable basis. Timely engagement and defensible methodology were critical to achieving this outcome. 

For expert assistance with Purchase Price Allocation, fair value assessments, or navigating ASC 805 and IFRS 3 requirements, please contact: