A Purchase Price Allocation (“PPA”) is an exercise intended to identify what was actually purchased -- all of the assets, both tangible and intangible, as well as any liabilities -- and assigning a Fair (or Fair Market) Value to these various components. Also known as the transaction price/value, this is the price paid for the equity of a company and is calculated as shown to the right. As a simple example, if a valuation finds that all of a company’s assets, both tangible and (identifiable) intangible, total to $8M, and a buyer acquired that company for $10M, that means the buyer has paid $2M above the Fair Value of these tangible and intangible assets. Why would anyone pay more for something than it is supposedly worth? The incremental depreciation of the write-up of PP&E for book purposes results in pre-tax income that is lower for book purposes than for tax purposes. Happy to chat in more detail if you like. The company incurred excessive shipping charges to obtain materials on short notice from suppliers. By: Scott Van Vooren This blog post is a part of Lane & Waterman’s M & A Blog Series. It could also be due to the buyer’s presumption that there is some strategic synergy in acquiring the company. made sense. Specifically, IRS form 8594 requires completion and signatures by both buyer and seller as to the allocation of the purchase price among various classes of assets. However, in a stock acquisition, there is no corresponding write-up for tax purposes. However, before recognizing any such gain, the acquirer should check the PPA parameters for accuracy. The main reason purchase accounting is necessary is for financial reporting purposes. However, a savvy investor would expect to see that Facebook has been able to ascertain that the price that it paid to acquire current assets and liabilities, technology, customers, trademarks, etc. Documentation is required for the process by which the value of the non-compete is determined. Purely on a cash flow basis, the justification for the price paid may not seem obvious. The acquisition of a business requires an allocation of the purchase price for tax and/or financial reporting purposes. If consideration paid includes anything other than cash -- such as stock, debt, or cryptocurrency -- it may be necessary to value the currency used. Now, suppose Alpha's pro forma GAAP pre-tax income is $46mm and its cash taxable income is $50mm in the first year after closing the acquisition of Tango. What journal entry will Alpha make at the acquisition date? Purchase Price Adjustments in Acquisition Agreements. The purchase price paid for the business is then allocated among the Fair Values of the identifiable assets (and liabilities, if any). Understanding the potential impact on earnings per share as those assets get amortized requires gathering the data immediately after the transaction, while it’s still available. The standard price is the price that engineers believe the company should pay for an item, given a certain quality level, purchasing quantity, and speed of delivery. Generally, assets that may be linked to a prospective income stream are valued by a form of the Income Approach to evaluate their likely effect on income. Anything that arises that is not included in the original quote is typically assessed at an hourly services rate. GAAP pre-tax income is lower than cash taxable income due to GAAP depreciation and amortization of incremental PP&E and identifiable intangibles—$10 and $20, respectively—created in the acquisition. Instead, the acquirer expenses these charges as incurred and the services received, while debt and equity financing fees continue to receive the same accounting treatment described above. For book accounting purposes, intangibles with finite lives are amortized over their useful lives, while indefinite-lived intangibles (like goodwill) are not amortized but, rather, tested for impairment. By getting a PPA and being able to identify and place value on your company’s key tangible and intangible assets, you can put together a pitch book that aids in attracting a prospective buyer.
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