Purchase Price Allocation (PPA)

Purchase price allocation is the process (under ASC 805 in US GAAP) of allocating the purchase price of an acquired business to the fair values of its identifiable assets and liabilities, with the unexplained remainder recorded as goodwill.

Mechanics: start with equity purchase price, subtract the target's existing book value of equity, write off the target's existing goodwill, write up tangible and identifiable intangible assets (customer relationships, trademarks, developed technology) to fair value, record any deferred tax liability created by write-ups in a stock deal, and the residual is new goodwill.

Goodwill is not amortized under US GAAP; it is tested (at least annually) for impairment. Finite-lived identifiable intangibles are amortized, creating the incremental amortization expense that hits pro forma EPS in a merger model. In a taxable asset deal (or a 338(h)(10) election), write-ups and goodwill can be tax-deductible, which changes deal economics.