Purchase price allocation
Learn what purchase price allocation is, why it matters, how it's done, and how it works in Canada.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Purchase price allocation splits the price you pay for a business across its individual assets and liabilities, with anything left over recorded as goodwill.
- The formula is straightforward: purchase price equals the fair value of tangible assets plus intangible assets, minus liabilities, plus goodwill.
- In Canada, business combinations follow IFRS 3 or ASPE Section 1582, and both require acquired assets and liabilities to be recorded at their acquisition-date fair value.
- Getting the allocation right supports accurate reporting, tax treatment, and clearer decisions about the deal.
What is purchase price allocation?
Purchase price allocation (PPA) is the process of assigning the price paid for a business to each of its identifiable assets and liabilities, with any remaining amount recorded as goodwill.
It happens after one company acquires another. You work out the fair value of everything you bought, from equipment and inventory to intangibles like customer relationships, then account for the debts you took on.
Getting these numbers right keeps your reporting accurate and your balance sheet clear. Discover how online accounting software can help streamline your balance sheet reporting.
Why purchase price allocation is important
A clear allocation shapes how the acquisition shows up in your accounts and what it means for tax. Here's why it matters:
- Financial clarity: it shows the true value of what you acquired, so your financial statements reflect the deal accurately
- Strategic planning: it helps you understand which parts of the business hold the most value and where to focus
- Taxation and depreciation: the values you assign affect how assets are depreciated and how the acquisition is treated for tax
- Transparency: IFRS requires purchase price allocation, and tax authorities and regional accounting standards may require it too
How purchase price allocation is done
The process breaks down into three clear steps that move from identifiable assets through to goodwill. Follow these steps:
- Calculate the net identifiable assets: add up the fair value of tangible assets like property and equipment, then include intangible assets such as customer relationships, trademarks, patents, non-compete agreements, and proprietary technology, and subtract the liabilities you took on
- Apply write-ups or write-downs: adjust each asset and liability from its book value to its fair value at the acquisition date
- Calculate goodwill: subtract the net identifiable assets from the total purchase price, and the remainder is goodwill
Goodwill captures the value that isn't tied to a specific asset, such as brand reputation, a loyal customer base, or a skilled team you've acquired.
Purchase price allocation formula
The formula gives you a plain way to check that your allocation adds up. Here it is written out:
purchase price = fair value of tangible assets + fair value of intangible assets − fair value of liabilities + goodwill
Purchase price allocation example
A worked example makes the steps easier to follow. Say you buy a landscaping business for $500,000 and need to allocate that price. Reading your balance sheet helps you confirm the figures:
- Tangible assets total $370,000
- Assumed liabilities total $20,000
- Goodwill totals $150,000
You calculate goodwill like this: $500,000 - ($370,000 - $20,000) = $150,000.
Purchase price allocation in Canada
Canadian rules set out how you record an acquisition, and which standard applies depends on how your business reports. In Canada, business combinations follow IFRS 3 Business Combinations for IFRS reporters and ASPE Section 1582 Business Combinations for private enterprises.
Both standards require acquired assets and liabilities to be recorded at their acquisition-date fair value. Under IFRS, goodwill is tested for impairment rather than amortized, while ASPE offers a policy choice.
Simplify your acquisition accounting with Xero
Sorting through fair values, goodwill, and adjusted balances takes clear records and reliable reporting. Xero brings your finances together in one place so you can track assets, liabilities, and goodwill with less manual admin and see where your acquisition stands. Set up your books to handle the numbers with confidence and get one month free.
FAQs on purchase price allocation
Here are answers to some frequently asked questions about purchase price allocation.
What is the purchase price allocation formula?
The formula is: purchase price = fair value of tangible assets + fair value of intangible assets − fair value of liabilities + goodwill. Rearranging it lets you solve for goodwill once you know the fair values.
When is a purchase price allocation done?
You complete a purchase price allocation after acquiring another business, as part of accounting for the combination. It's done at the acquisition date, using fair values measured on that date.
How is goodwill treated after an acquisition?
Under IFRS, goodwill isn't amortized but is tested for impairment at least once a year. Under ASPE, private enterprises can choose a policy for how they account for it.
What intangible assets are identified in a purchase price allocation?
Common intangibles include customer relationships, trademarks, patents, non-compete agreements, and proprietary technology. Each is measured at fair value and recorded separately from goodwill.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.