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5 Key Steps to Prepare a Purchase Price Allocation After A Business CombinationStep 1: Determine the Fair Value of Consideration Paid.Step 2: Revalue all Existing Assets and Liabilities to their Acquisition Date Fair Values.Step 3: Identify Intangible Assets Acquired.More items...?
In acquisition accounting, purchase price allocation is a practice in which an acquirer allocates the purchase price into the assets and liabilities of the target company acquired in the transaction. Purchase price allocation is an important step in accounting reporting after the completion of a merger or acquisition.
Reduce the purchase price by the amount of Class I assets (cash and equivalents) transferred from seller to buyer. Allocate the remaining purchase price to Class II assets (Securities), then to Class III (Accounts Receivable), IV (Inventory), V (Fixed Assets), and VI (Intangibles) assets in that order.
Generally, a purchase price allocation is an exercise that identifies each individual asset purchased, tangible and intangible, as well as any liabilities, then the assets are assigned a value. Typically, it is a three-step process: Determining the purchase price (total consideration paid)
The steps to performing purchase price allocation (PPA) are the following:Assign the Fair Value of Identifiable Tangible and Intangible Assets Purchased.Allocate the Remaining Difference Between the Purchase Price and the Collective Fair Values of the Acquired Assets and Liabilities into Goodwill.More items...
Purchase price allocations help to accurately reflect value drivers for an acquired business and help financial statement users understand what each part of the purchased business is worth. It is important to highlight that not all acquired targets are subject to being recorded as a business combination.
In an asset sale, the total purchase price of the business will generally be allocated into the following categories:Furniture, fixtures, and equipment (FF&E)Inventory.Non-competes and other intangibles.Seller training and transition assistance.Goodwill.
Typically, it is a three-step process:Determining the purchase price (total consideration paid)Identifying the correct assets acquired and liabilities assumed.Calculating the fair market value of those assets and liabilities.
In a non-stock sale, the usual principle is that the purchase price of the company's assets should be allocated based on fair market value. The buyer and the seller will negotiate the allocation of purchase price for these assets so that neither party is disadvantaged by the sale.
Allocating the purchase price, or total sale price, of a business among the various assets of the business (asset classes) is necessary for tax purposes when a business is sold. This is the case regardless of whether the sale is structured as a stock sale or an asset sale.