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PPA - Purchase Price Allocation

PPA is a process of allocating the purchase price to the assets and liabilities of the purchased entity, as required by the generally accepted accounting principles applying to business combinations and intangible assets.

Purchase Price Allocation is based on the fair value valuation of any tangible and intangible assets (and liabilities) of a purchased entity.

 Fair Value is defined as the amount at which  the asset (liability) might be exchanged between knowledgeable, willing parties in an arm’s length transaction.

The PPA process includes the following steps:

1. Tangible assets and liabilities – Fair value evaluation of any tangible assets (liabilities) of the purchased entity at the purchase date.

2. Intangible assets (other than goodwill) – Identification and fair value evaluation of any intangible assets purchased.  In addition, as part of the process, estimation of the useful lives of the intangible assets is made.

3. Goodwill – The value of the goodwill that was purchased is derived from the gap between the purchase price and the collective fair value that was attributed to the assets and liabilities at the previous steps.

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