What is purchase price allocation (PPA)?

Published Monday 22 June 2026

Table of contents

• What is purchase price allocation?
• Why purchase price allocation is important
• How purchase price allocation works
• Types of assets in purchase price allocation
• Purchase price allocation example
• Accounting standards for purchase price allocation in Australia
• Simplify your business finances with Xero
• FAQs on purchase price allocation

Key takeaways

• Purchase price allocation (PPA) is the process of assigning the purchase price of a business to its individual assets and liabilities at fair value, with any remaining amount recorded as goodwill.
• PPA is required under Australian Accounting Standards Board (AASB) 3 whenever you acquire a business, helping you understand exactly what you paid for and how to report it.
• Completing a PPA can unlock tax benefits, because certain assets like equipment or intellectual property can be depreciated or amortised over time, reducing your taxable income.
• Working with a qualified valuer or accountant is the best way to make sure your PPA is accurate, compliant, and set up to support your financial reporting from day 1.

What is purchase price allocation?

Purchase price allocation (PPA) is the process of breaking down the total price you pay for a business and assigning that amount to the individual assets and liabilities you've acquired. Each asset and liability is recorded at its fair value on the date of acquisition. If the purchase price is higher than the total net fair value of those assets and liabilities, the difference is recorded as goodwill.

PPA is required under International Financial Reporting Standards (IFRS) 3 and its Australian equivalent, AASB 3 Business Combinations. If you're a small business owner buying another business or merging with one, PPA helps you understand what you actually paid for and how to reflect those values in your financial records.

Why purchase price allocation is important

Getting your purchase price allocation right has a direct impact on your financial statements, tax position, and ability to plan ahead.

Financial clarity and accurate reporting

PPA gives you a clear picture of what each part of the acquired business is worth. Instead of recording the entire purchase as a single lump sum, you break it down into tangible assets, intangible assets, liabilities, and goodwill. This makes your balance sheet more accurate and gives you better insight into what's driving the value of your acquisition.

Tax benefits of purchase price allocation

Allocating the purchase price to specific assets can create tax advantages. Tangible assets like equipment and vehicles can be depreciated, while certain intangible assets like patents or customer contracts can be amortised. These deductions reduce your taxable income over time, similar to how accumulated depreciation works for existing assets. Talk to your accountant or tax adviser about how PPA applies to your specific situation.

Strategic planning and decision-making

Understanding the fair value of each asset helps you make smarter decisions about the business you've acquired. You can identify which assets are generating returns, which ones may need investment, and where there might be risks. This information is valuable for budgeting, forecasting, and long-term planning.

Compliance with accounting standards

If your business prepares general-purpose financial statements, you're required to complete a PPA under AASB 3 when you acquire another business. Even if you prepare special-purpose statements, following PPA best practices keeps your records consistent and makes future audits or due diligence smoother.

How purchase price allocation works

The PPA process involves 3 main steps. While it can seem complex, the basic idea is straightforward: work out what you bought, what it's worth, and what's left over.

1. Identify and value net assets

Start by listing all the identifiable assets and liabilities of the business you've acquired. Assets include things like equipment, inventory, customer contracts, and intellectual property. Liabilities include debts, outstanding bills, and employee obligations. Each item needs to be identified separately so it can be valued.

2. Adjust assets to fair value

Next, adjust each asset and liability to its fair value on the date of acquisition. Fair value is the price a knowledgeable buyer would pay in an open market. This might differ from the book value already recorded in the seller's accounts. For example, a piece of equipment might be worth more or less than what the original owner has it listed at.

3. Calculate goodwill

Once you've determined the fair value of all net assets (total assets minus total liabilities), compare that figure to the total purchase price. If you paid more than the fair value of net assets, the difference is goodwill. Goodwill represents things like the business's reputation, loyal customer base, or market position that aren't captured by individual asset values.

Types of assets in purchase price allocation

When completing a PPA, you'll encounter several categories of assets and liabilities. Understanding these categories helps you allocate the purchase price accurately.

Tangible assets are physical items you can see and touch. These include property, equipment, vehicles, inventory, and cash. They're usually the simplest to value because comparable market prices are often available.

Identifiable intangible assets are non-physical items that still hold measurable value. Common examples include:

• customer relationships and contracts
• brand names and trademarks
• patents and proprietary technology
• licences and permits
• non-compete agreements

These assets must be separately identifiable, meaning they can be sold, transferred, or licensed independently, or they arise from contractual or legal rights. Valuing intangible assets typically requires a professional valuer.

Liabilities assumed in the acquisition also form part of the PPA. These include outstanding loans, accounts payable, employee entitlements, and any warranties or legal obligations. You subtract total liabilities from total assets to arrive at net assets.

Purchase price allocation example

Here's a simple example to show how PPA works in practice. Suppose you buy a landscaping business for $500,000. After working with a valuer, you identify the following fair values.

Assets:

• Vehicles and equipment: $150,000
• Inventory (supplies and materials): $20,000
• Customer contracts: $100,000
• Brand name: $50,000
• Other tangible assets: $50,000

Total assets at fair value: $370,000

Liabilities:

• Outstanding supplier invoices: $10,000
• Employee entitlements: $10,000

Total liabilities: $20,000

Net assets at fair value: $370,000 - $20,000 = $350,000

Goodwill: $500,000 - ($370,000 - $20,000) = $150,000

The $150,000 goodwill reflects the value of things like the business's reputation, established customer base, and market position that aren't captured by the individual assets.

Accounting standards for purchase price allocation in Australia

In Australia, PPA is governed by AASB 3 Business Combinations, which is based on IFRS 3. This standard applies whenever 1 entity acquires control of another business.

AASB 3 requires you to identify all assets acquired and liabilities assumed, measure them at fair value on the acquisition date, and recognise any goodwill or gain from a bargain purchase. The standard applies to all entities that prepare general-purpose financial statements under Australian Accounting Standards.

For many small business acquisitions, a qualified independent valuer will need to assess the fair value of intangible assets and other items that don't have a straightforward market price. Your accountant can help you determine whether a formal valuation is required and connect you with the right specialist. You can also find an adviser through Xero if you need help getting started.

Simplify your business finances with Xero

Acquiring a business is a big step, and keeping your finances organised from the start makes the transition smoother. Xero's accounting software makes it easy to track your assets and manage your reporting in one place. It also lets you collaborate with your accountant in real time.

Whether you're integrating a new acquisition or managing day-to-day bookkeeping, Xero helps you stay on top of your numbers so you can focus on growing your business. Get one month free.

FAQs on purchase price allocation

Here are answers to frequently asked questions about purchase price allocation.

What is goodwill in purchase price allocation?

Goodwill is the amount you pay above the fair value of a business's net identifiable assets. It reflects intangible factors like reputation, customer loyalty, and market position that add value beyond what individual assets are worth.

When should a purchase price allocation be done?

A PPA should be completed as soon as practicable after the acquisition date. Starting the valuation process early, ideally before settlement, gives you more time to gather the information you need and reduces the risk of errors.

What are intangible assets in purchase price allocation?

Intangible assets are non-physical items with measurable value, such as customer relationships, brand names, patents, technology, and licences. To be recognised in a PPA, they must be separately identifiable from goodwill.

How does purchase price allocation affect tax?

PPA can create tax deductions by allocating value to depreciable or amortisable assets. The specific tax treatment depends on the type of asset and Australian tax rules, so it's best to work with a tax adviser for guidance on your situation.