A purchase price allocation (PPA) takes the price paid in a business acquisition and allocates it across the fair value of the identifiable assets acquired and liabilities assumed, with whatever is left recognized as goodwill. It happens once, shortly after closing, but its effects run through the acquirer's financial statements for years — through amortization of the intangibles it identifies and through the goodwill impairment testing it sets up.
This guide walks through what a PPA actually does, the standards it follows, the intangible assets it typically uncovers, and how it connects forward to goodwill impairment testing. For the broader valuation service context, see valuations for financial reporting and M&A and acquisition advisory.
Why a PPA is required
When one company acquires another, the acquirer does not simply record the target's old book values. The consideration paid — cash, shares, contingent payments, or a combination — has to be allocated across the fair value of everything acquired, on the acquisition date, not the target's historical cost. This matters because a target's own balance sheet frequently understates what was actually acquired: internally developed customer relationships, brand value and technology are rarely carried on a company's books at anything close to their economic worth, precisely because internally generated intangibles are usually not recognized until an arm's-length transaction puts a price on them.
The standard that governs a PPA
Under IFRS, business combinations and the resulting allocation are governed by IFRS 3, Business Combinations. Canadian private companies reporting under ASPE follow the ASPE business combinations standard, which applies broadly similar allocation principles — identify the acquirer, determine the acquisition date, measure the consideration transferred, and recognize identifiable assets and liabilities at fair value — adapted to a private-company reporting context. The two frameworks are not identical in every respect, and where the detail matters to a specific transaction, confirm the applicable requirements against the standard your entity actually reports under rather than assuming IFRS and ASPE treat every item the same way.
What a PPA typically identifies
A PPA process generally works through these steps:
- Identify the acquirer and the acquisition date — the party that obtains control, and the date control transfers.
- Measure the consideration transferred — cash, equity issued, and the fair value of any contingent consideration.
- Identify and value the identifiable assets acquired and liabilities assumed at fair value on the acquisition date, including intangible assets not previously recognized by the target.
- Calculate the residual — consideration less the fair value of identifiable net assets — which is recognized as goodwill, or in rarer cases as a bargain-purchase gain after the analysis is reassessed.
Intangible assets commonly identified in a PPA
- Customer relationships — the value of an existing, retainable customer base.
- Trade names and brands — recognition and reputation value separate from goodwill.
- Developed technology or software — proprietary systems, platforms or IP.
- Non-compete agreements — value protected by a departing owner's or key employee's restrictive covenant.
- Order backlog — contracted revenue not yet delivered at the acquisition date.
Each of these has to be valued individually, using an appropriate method for that asset class, rather than lumped into a single intangible bucket.
Why the allocation matters after closing, not just at closing
A PPA is not a one-time compliance exercise — its outputs drive future financial statements. Intangible assets with finite useful lives are amortized over those lives, changing reported earnings for years after the deal. Goodwill is not amortized under most current standards, but it has to be tested for impairment, and the assumptions baked into the original PPA — the cash flows and discount rate used to value the target — become the benchmark that future impairment tests are measured against. An aggressive allocation to goodwill at closing, done to minimize near-term amortization, can set up a harder impairment test later if performance falls short.
How RN Canada helps
RN Canada prepares purchase price allocations for Alberta and BC businesses that have made an acquisition, identifying and valuing the intangible assets a deal creates, documenting the assumptions to the standard the entity reports under, and delivering a report built to be reviewed by the entity's auditor. Because we also advise on the transaction itself, we can flag before a deal closes how the eventual PPA and amortization profile is likely to look, which can influence how a deal is structured. Our founder, Ozgur Duymaz, holds a Ph.D. in accounting and finance and is a CPA (Canada), ACCA (UK) and CMA (US). For the full valuations-for-financial-reporting service, see valuations for financial reporting, or talk to us about an upcoming acquisition.
This page is general information, not personalized advice. Speak to us about your specific situation.
Frequently asked questions
A purchase price allocation (PPA) is the process of allocating the consideration paid to acquire a business across the fair value of the identifiable assets acquired and liabilities assumed, with any amount left over recognized as goodwill. It happens after a business combination closes and feeds directly into the acquirer's post-acquisition financial statements.
Under IFRS, business combinations and the resulting purchase price allocation are governed by IFRS 3, Business Combinations. Private Canadian companies reporting under ASPE follow the ASPE business combinations standard, which applies broadly similar allocation principles adapted to a private-company reporting environment.
Common examples include customer relationships, trade names and brands, developed technology or software, non-compete agreements, and order backlog. These assets often exist economically inside the acquired business but were never separately recognized under the target's own accounting, and a PPA identifies and values them for the first time.
The residual — consideration paid, less the fair value of identifiable net assets acquired — is recognized as goodwill. In the rarer case where identifiable net assets exceed the consideration paid, the result is a bargain purchase, which requires the acquirer to reassess its work before recognizing a gain.
Yes. Identified intangible assets with finite lives are typically amortized over those lives, which affects post-acquisition earnings. Goodwill is not amortized under most current standards but is instead tested for impairment, which introduces its own future earnings risk if performance falls short of the assumptions made at acquisition.