Purchase Price Allocation
Purchase price allocation is the accounting exercise, required under IFRS 3 and ASC 805, in which a buyer divides the price it paid for a company among the identifiable assets and liabilities it acquired at their fair values — customer relationships, technology, brand, contracts, deferred tax — with whatever is left recorded as goodwill.
- Also known as
- PPA, Acquisition accounting, Fair value allocation
- Used at
- after completion, within the buyer's measurement period of up to twelve months
- Binding
- it is an accounting requirement, audited, and it fixes future amortisation charges
- Typical intangibles in fintech
- customer relationships, developed technology, licences and scheme memberships, brand
- Amortised
- identified intangibles over their useful lives (3–15 years); goodwill is not amortised under IFRS but tested for impairment
- Done by
- the buyer's finance team, usually with a valuation adviser
How purchase price allocation works in practice
A buyer pays one number for a company; its accounts have to say what that number bought. Purchase price allocation answers by listing every identifiable asset and liability at fair value on the acquisition date — and "identifiable" reaches well beyond the target's own balance sheet. A payments company carries its merchant contracts at nothing; the buyer records them as a customer-relationship intangible worth the present value of the profit they will bring. Its platform was expensed as it was written; the buyer records it as developed technology at replacement cost. Its e-money licence, its card scheme memberships and its brand each get a value. The difference between the price and the sum of those values is goodwill: the price of the assembled workforce, the future customers and the synergies the buyer expects.
The exercise decides the buyer's profit and loss for years. Each identified intangible is amortised over its useful life, and that charge sits below EBITDA but above net profit; a €20m customer-relationship asset over eight years is €2.5m of annual amortisation. Goodwill is not amortised under IFRS but tested for impairment every year, and an impairment is a public statement that the buyer overpaid.
Deal teams increasingly model the allocation before signing, because a structure that lands more of the price on goodwill flatters net profit and one that lands it on short-lived technology does the opposite.
Example
A bank buys a payments company for €50m. The target's own balance sheet shows €3m of net assets. The allocation values customer relationships at €18m (eight-year life), developed technology at €7m (five years), the payment institution licence and scheme memberships at €4m (indefinite), the brand at €1m (ten years), and a deferred tax liability of €5.5m on the uplift. Identifiable net assets come to €27.5m, so goodwill is €22.5m. Annual amortisation of the finite-lived intangibles is €3.75m, which is why the buyer's earnings guidance the following year is given "before amortisation of acquired intangibles".
Common mistakes
- Treating the allocation as bookkeeping and being surprised by the amortisation it creates. - Valuing the intangibles without the deal model, so the allocation and the price rest on different forecasts. - Forgetting the deferred tax on the uplift, which increases goodwill. - Assigning an indefinite life to a licence that can be revoked, and to a customer base that churns. - Leaving the allocation to the year-end auditors instead of the deal team who knew why the price was paid.