Purchase price allocation (PPA)
Learn what purchase price allocation is, why it matters, how it works, and see a worked example.
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- Purchase price allocation (PPA) is the process of assigning the price you paid for a business to its individual assets, liabilities, and goodwill at fair value, so your books reflect what you actually bought.
- In South Africa, PPA is required under IFRS 3, or under Section 19 of the IFRS for SMEs Standard for businesses that report on that basis, whenever you acquire a business.
- The process runs in three steps: identify and value the net identifiable assets at fair value, record any write-ups or write-downs, and calculate goodwill as the difference that remains.
- Working with a qualified accountant or valuation expert helps you get the allocation right, because PPA calls for professional judgment and has to comply with the accounting standard you report under.
What is purchase price allocation?
If you've recently bought a business, or you're planning to, purchase price allocation is one of the first accounting steps you'll need to tackle.
Purchase price allocation (PPA) is the process of assigning the total purchase price of an acquired business to its individual assets and liabilities at fair value. Your accountant breaks down the lump sum you paid into specific categories: tangible assets like equipment and inventory, intangible assets like customer relationships and trademarks, liabilities like outstanding debts, and goodwill for any remaining value.
The goal is to make sure your balance sheet accurately reflects what you bought and what each piece is worth. Without PPA, your financial records would show a single large payment with no detail behind it.
Why purchase price allocation matters
Understanding why purchase price allocation matters helps you see it as more than a compliance exercise. It gives you clarity on your investment and shapes your financial strategy from day one.
Financial clarity
PPA gives you a detailed picture of exactly what you paid for. Instead of a single line item on your balance sheet, you'll see the fair value of each asset and liability. This helps you understand whether you paid a premium for the business and where that value sits.
Tax benefits and depreciation
How you split the purchase price affects your tax position. Qualifying tangible assets can attract wear-and-tear allowances from SARS that reduce your taxable income over time, while purchased goodwill is capital in nature, so no capital allowances are available for it. A carefully documented PPA supports the deductions you're entitled to claim in the years after the acquisition.
Strategic planning
Knowing the fair value of what you acquired helps you make smarter decisions about upgrades, expansions, and operations. If you find that a key piece of equipment is near the end of its useful life, you can plan for replacement costs early.
Regulatory compliance
PPA isn't optional. In South Africa it's required under IFRS 3 Business Combinations, or under Section 19 of the IFRS for SMEs Standard for businesses that report on that basis, whenever you acquire a business. Getting PPA right keeps your financial statements audit-ready and helps you avoid restated financials or penalties.
How purchase price allocation works
Purchase price allocation follows a structured process that your accountant or valuation expert will lead. Here's how the three main steps work in practice.
1. Identify and value net identifiable assets
The first step is to work out the total consideration, then catalogue every asset and liability the acquired business holds. Total consideration includes the cash you pay plus any deferred payments and contingent consideration, such as an earn-out tied to future performance.
This includes tangible assets like property, vehicles, and inventory, as well as intangible assets like trademarks, customer lists, and proprietary technology. Each item gets a fair value, which is what it would sell for in an open-market transaction. The total of all asset values minus all liabilities gives you the net identifiable assets.
2. Record write-ups or write-downs
The fair values from step 1 often differ from the amounts on the seller's books. When an asset's fair value is higher than its book value, that's a write-up. When it's lower, that's a write-down.
For example, a piece of commercial property might be carried on the seller's balance sheet at R200,000 but appraised at R280,000. You'd record a write-up of R80,000. These adjustments are accounting entries only, so no cash changes hands. They make sure your balance sheet reflects current market values rather than the seller's historical costs.
3. Calculate goodwill
After you've assigned fair values to all identifiable assets and liabilities, any remaining purchase price is recorded as goodwill. Goodwill represents the premium you paid above the net fair value of identifiable assets, and it usually reflects things like brand reputation, a loyal customer base, and skilled employees.
You have up to 12 months after the acquisition date, known as the measurement period, to finalise your PPA. During this time you can adjust fair values as you gather more information, and after that window closes the allocation is locked in. You can find accounting professionals experienced in PPA through the Xero advisor directory.
Key components of purchase price allocation
A thorough purchase price allocation breaks the acquisition down into several distinct components. Understanding each one helps you see where your money went.
Net identifiable assets
Net identifiable assets are everything the acquired business owns minus everything it owes. This includes physical property, cash, receivables, inventory, and any debts or obligations. Only assets and liabilities that can be separately identified and measured qualify.
Fair value adjustments
Fair value adjustments bring the seller's book values in line with current market values. These adjustments can increase or decrease the recorded value of individual assets and liabilities. They also create deferred tax assets or liabilities, because the tax base of an asset may differ from its newly assigned fair value.
Intangible assets
Intangible assets are non-physical assets that have measurable value. Common examples in a small business acquisition include customer relationships, trade names, non-compete agreements, proprietary software, and patents. A valuation expert measures each one using an appropriate approach, such as market comparisons, income-based methods like relief-from-royalty and excess-earnings, or a cost-based calculation.
Goodwill
Goodwill is the residual, the amount left over after you've allocated the purchase price to all identifiable assets and liabilities. It captures value that can't be tied to a specific asset, like a strong reputation or an established market position. How you treat goodwill afterwards depends on the standard you report under, which the accounting standards section below explains.
Purchase price allocation example
Seeing purchase price allocation in action makes it easier to understand. Here's a practical example using a small business acquisition.
Let's say you buy a landscaping business for R500,000. Your accountant and a valuation expert work through the PPA process and identify the following tangible assets.
- Workshop: R329,000
- Truck: R25,000
- Trailer: R8,000
- Mower (1): R3,000
- Mowers (2): R2,000 each
- Miscellaneous tools: R1,000
Total tangible assets: R370,000. The business also carries one liability: warranty obligations to existing customers of R20,000.
Net identifiable assets come to R370,000 minus R20,000, which equals R350,000. Goodwill is then R500,000 (purchase price) minus R350,000 (net identifiable assets), which equals R150,000.
The R150,000 in goodwill reflects the business's reputation, customer base, and other intangible qualities that made it worth more than the sum of its parts. All of these values go onto your balance sheet, giving you a clear picture of what you acquired. Before you make an offer, it helps to work out what a business is worth using more than one method.
Common purchase price allocation mistakes
A few errors come up again and again in purchase price allocations. Watching for them helps you get a defensible result the first time.
- Under-identifying intangible assets, which inflates goodwill and can overstate your future impairment risk
- Starting the allocation too late, after completion, rather than alongside your due diligence
- Forgetting contingent consideration, so earn-outs and deferred payments are left out of the total consideration
- Overlooking the deferred tax that arises when you recognise intangible assets at fair value
Share purchase vs asset purchase
The structure of your acquisition affects how purchase price allocation works. There are two main deal types, and each has different implications for your books and taxes.
Share purchase
In a share purchase, you buy the shares in the company and take over the entire business entity, including all its assets, liabilities, contracts, and legal obligations. From an accounting perspective, you'll still complete PPA to record the assets and liabilities at fair value on your consolidated balance sheet.
The tax treatment of a share purchase can be less favourable for buyers, because you generally inherit the company's existing tax base in the assets. That means you may not get the benefit of higher wear-and-tear or amortisation deductions. Share purchases are often simpler to execute, though, because contracts and licences stay with the entity.
Asset purchase
In an asset purchase, you buy specific assets and take on specific liabilities rather than the whole entity. You choose which assets you want and which liabilities you're willing to accept, and this structure is common in small business acquisitions.
Asset purchases are usually more tax-friendly for buyers. You get a stepped-up base cost in the purchased assets, which can support higher wear-and-tear and amortisation deductions in future years. The PPA process is much the same, but the tax benefits can be meaningful, so talk to your accountant about which structure suits your situation.
Accounting standards for purchase price allocation
Purchase price allocation is both good practice and a formal requirement under accounting standards. Knowing which rules apply helps you and your accountant get the process right.
IFRS 3 (Business Combinations)
If your business reports under full IFRS, IFRS 3 sets the rules for PPA. It requires you to recognise all identifiable assets and liabilities at fair value on the acquisition date, with any excess purchase price recorded as goodwill. IFRS 3 also requires detailed disclosures about the acquisition in your financial statements.
IFRS for SMEs (Section 19)
Many South African small businesses report under the IFRS for SMEs Standard, where Section 19 governs business combinations. It applies the same acquisition method and fair value measurement, with one important difference: under Section 19, goodwill is amortised over its useful life, capped at 10 years where you can't estimate the life reliably.
The measurement period
Under IFRS 3, and equally under IFRS for SMEs, you have a measurement period of up to 12 months after the acquisition date. During this time you can adjust the initial PPA as new information about asset values or liabilities comes to light. Once the measurement period ends, the allocation is final.
Goodwill impairment testing
Under full IFRS, goodwill isn't amortised. Instead it's subject to annual impairment testing. If the value of the acquired business drops below the carrying amount on your books, you may need to write goodwill down.
Simplify your post-acquisition finances with Xero
Once the purchase price allocation is done, the real work begins: managing the finances of your newly acquired business. You'll need accurate reporting, clear records, and a way to collaborate with your accountant as you bring everything together.
Xero's accounting software helps you stay on top of your post-acquisition finances. You can run financial reports that reflect your updated balance sheet, track wear and tear on newly acquired assets, and give your accountant real-time access to your books. To get started with your post-acquisition bookkeeping, get one month free.
FAQs on purchase price allocation
Here are answers to common questions about purchase price allocation to help you navigate the process.
When is purchase price allocation required?
PPA is required whenever one business acquires control of another, regardless of size. Both IFRS 3 and Section 19 of the IFRS for SMEs Standard require it for business combinations, including small business acquisitions.
Who performs purchase price allocation?
Your accountant typically leads the PPA process, often with support from a third-party valuation specialist. The valuation expert provides independent fair value estimates for complex assets like intangible property and real estate.
What happens if the purchase price is less than net assets?
When you pay less than the fair value of net identifiable assets, it's called a bargain purchase. Under IFRS 3, you recognise the difference as a gain in profit or loss in the period of acquisition.
How long does the purchase price allocation process take?
Most allocations are finalised within three to six months, though the standards allow up to 12 months. The timeline depends on the complexity of the business and how quickly the valuations can be completed.
Is goodwill tax deductible in South Africa?
Generally no. Purchased goodwill is capital in nature, so you usually can't claim a tax deduction for it. Qualifying tangible assets and certain intangibles may attract allowances, so check the treatment of each item with your accountant.
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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.