Purchase Price Allocation
Successful investing is anticipating the anticipation of others.
—John Maynard (Lord) Keynes (1883–1946), British economist
AFTER A BUSINESS COMBINATION IS CLOSED, the real valuation work begins. Both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) require that an acquirer be identified and that all the assets and technologies acquired and the liabilities and contingencies assumed of the target (the acquired entity) be recorded for consolidation purposes, at their fair values. The difference between the total fair value of the net assets acquired and that of the consideration is ascribed to goodwill. This process is described as a purchase price allocation (PPA).
Preparing a PPA report can be a daunting task unless one is already familiar with all parts of the process—not only the governing rules and standards but also the sometimes complex valuation methods involved, especially for intangible assets. It is tempting to leave everything to the valuators and auditors; unfortunately, management is responsible. The valuators are only advisors; they deliver the facts (sometimes as ranges) but do not make the final decisions. Nor do the auditors, who only verify the reasonableness of the conclusions and supporting data. Frequently, managers are surprised by last-minute questions or astonished by the impact on profits of the amortization of the (new) fair values of both assets and liabilities. This chapter ...