Purchase Price Allocation (PPA): The Complete ASC 805 Guide
FairValueX Team · 12 min read
What Is a Purchase Price Allocation?
Under ASC 805, Business Combinations, the acquirer must recognize and measure the identifiable assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the purchase price over the net fair value of identifiable assets is recorded as goodwill.
This isn't optional: any business combination accounted for under the acquisition method requires a PPA. And because intangible assets often constitute 50-80% of the purchase price in technology, healthcare, and services acquisitions, the PPA directly determines your goodwill balance — which affects impairment testing for years to come.
What Assets Require Valuation?
Tangible Assets
- Property, plant & equipment (at fair value, not book value)
- Inventory (at fair value — finished goods at NRV less selling effort)
- Real estate holdings
Intangible Assets — The Complex Part
ASC 805-20-55 provides guidance on identifying intangible assets. They must meet either the contractual/legal criterion or the separability criterion to be recognized separately from goodwill:
| Intangible Asset | Criterion | Typical Method | Useful Life |
|---|---|---|---|
| Customer relationships | Separable | MPEEM | 5-15 years |
| Trade names / brands | Contractual/Legal | Relief from Royalty | Definite or indefinite |
| Developed technology | Both | Relief from Royalty / MPEEM | 3-7 years |
| In-process R&D (IPR&D) | Both | MPEEM | Indefinite (until complete/abandoned) |
| Non-compete agreements | Contractual | With/Without | Contract term |
| Order backlog | Contractual | DCF of backlog | Burn-off period |
| Assembled workforce | Neither (absorbed in goodwill) | Cost-to-recreate | N/A (contributory asset) |
PPA Methodologies
Multi-Period Excess Earnings Method (MPEEM)
MPEEM isolates the cash flows attributable to a specific intangible asset by deducting "contributory asset charges" — the return required by all other assets that contribute to generating those cash flows. It's the workhorse method for customer relationships and developed technology.
Read more: MPEEM vs Relief from Royalty →
Relief from Royalty Method
Values an intangible asset based on the hypothetical royalty the company would have to pay to license it from a third party. Most commonly used for trade names, patents, and developed technology.
With-Without Method
Compares the company's value "with" the intangible asset vs. "without" it. The difference is the asset's value. Used for non-compete agreements and some customer relationships.
Replacement Cost Method
Values an asset based on the cost to recreate it from scratch, adjusted for entrepreneurial profit. Used for assembled workforce (as a contributory asset charge in MPEEM) and sometimes for developed technology.
The PPA Timeline
Key Deadlines Under ASC 805
- Acquisition date: Recognition and measurement at fair value begins
- Measurement period: Up to 12 months from acquisition date to finalize the PPA. During this period, provisional amounts can be adjusted as new information is obtained.
- Financial statement disclosure: Preliminary PPA results must be disclosed in the first reporting period after the acquisition
- Goodwill tax deductibility: PPA allocation directly affects tax amortization of intangible assets and goodwill
Common PPA Audit Issues
Missing intangible assets
Auditors check whether all identifiable intangible assets have been recognized. Failing to identify customer relationships or developed technology inflates goodwill and may require restatement.
Inappropriate WACC / discount rates
Using the same discount rate for all assets ignores risk differences. Customer relationship cash flows are riskier than trade name royalties. Auditors verify that asset-specific risk premiums are applied.
Contributory asset charges in MPEEM
The most technically complex area. Missing or incorrect charges for working capital, fixed assets, assembled workforce, and other contributory assets is the most common MPEEM deficiency.
Useful life determination
Auditors challenge useful life assumptions because they directly affect amortization expense. Customer attrition analysis, technology obsolescence, and contract terms must support the selected lives.
PPA Complexity and Pricing
PPAs are more complex and time-intensive than 409A valuations. Pricing depends on:
- Number of intangible assets to be valued
- Availability of financial projections and customer data
- Complexity of the capital structure
- Whether the acquisition is a stock deal or asset deal (tax implications)
FairValueX PPA engagements are priced on a fixed-fee basis, scoped to the transaction's complexity, and include the same 20-section audit binder used in our 409A practice, adapted for ASC 805 requirements.
Related Resources
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