What is a purchase price allocation?

As defined under ASC 805, business combinations, must be accounted for using the acquisition method of accounting. Under the acquisition method of accounting, all identifiable assets acquired, including goodwill, liabilities assumed, and any non-controlling interests, should be stated on the balance sheet at fair value. Although not an allocation of the purchase price but rather a recognition of assets acquired and liabilities assumed at fair value, it’s still colloquially referred to as a purchase price allocation due to past accounting requirements. The purpose of the purchase price allocation is to help you identify all the assets that were acquired, tangible and intangible, and the liabilities that were assumed, and recognize them at fair value.

What does fair value mean and how is it determined?

According to paragraph 820-10-35-2 of ASC 820, Fair Value Measurement, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date — the closing date of the transaction. The business appraiser determines the fair value of the asset or liability by using valuation methodologies that are generally accepted by valuation experts and auditors, and consistent with the ASC 820 concept of using an exit price that increases the use of observable inputs.

Why might my company need a purchase price allocation?

Looking back to the discussion on ASC 805, you’ll most likely need a purchase price allocation if you recently completed a business combination and you have audited GAAP-basis financial statements. In this case, engage a purchase price allocation provider immediately after the closing of the transaction so the work can be completed before your audit begins. If you find yourself needing a purchase price allocation during your audit, it will likely be more difficult to find a provider that has capacity to do the work. Even if you can find one, it’ll likely be more costly.

What is rollover equity?

Sometimes it’s in the buyer’s or seller’s best interest for the seller to maintain ownership in the combined entity. When this occurs, it’s referred to as rollover equity. When rollover equity is present the purchase price allocation provider will consider whether it needs to be adjusted to fair value. Below are some examples of circumstances when the rollover equity value could need to be adjusted to fair value: The shares received by the seller have different economic rights than the shares held by the majority owner The shares received by the seller aren’t allowed to vote on matters requiring a vote The shares received by the seller have transfer restrictions If any of these factors are true, it’s likely additional analysis will have to be performed to determine the fair value of the rollover equity.

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Purchase price allocations: What are they and why might my company need one?

Aug. 18, 2022 · Updated Aug. 13, 2025 · Authored by Michael C. Massey, Robert E. Luman, Thomas Zambito

When acquiring another company, engaging an appraiser to conduct purchase price allocations as soon as the transaction closes is crucial to avoid rushing the process when trying to complete an audit later.

Purchase price allocations, more formally known as the determination of purchase consideration and recognition of acquired assets and liabilities at fair value under Accounting Standards Codification® (ASC) Topic 805, Business Combinations, (Topic 805) can require time and specialized knowledge so planning is beneficial.

Learn more about purchase price allocations so you can be in a proactive, rather than reactive, state when you need one.

The purpose of the purchase price allocation is to help you identify all the assets that were acquired and recognize them at fair value.

Common audit scenarios requiring purchase price allocations

Imagine it’s audit season and the process has been progressing smoothly until your auditor asks about the target — a company in which you acquired a majority stake last year — as the financial results of the acquisition will have to be included in your financial statements.

This means that the price paid for the target will need to be allocated among the following: