Advanced Valuation Topics – Purchase Price Allocations
Once an acquisition has been made, have you ever wondered which companies or departments does the transaction accounting for these deals? Valuation and business modelling departments are mostly in charge of purchase price accounting, especially when the company acquired is a technology company or a similar firm with significant amounts of intangible assets.
A purchase price allocation is essentially what its name suggests. It is a form of transaction accounting where one figures out the individual asset (both tangible and intangible) and liability values based on the transaction price of a deal.
Many of the assets valued include intangible assets like brand name, assembled workforce, developed technology, in process research and development, and customer relationships. Assets that are valued include inventory for example. These types of valuation can be important for a company because of depreciation and amortization (D and A) effects – both intangibles and tangible assets have to be depreciated and the allocated purchase price values will affect D and A, thereby impacting a company’s financial statements and net income.