Purchase Price Allocation (PPA) is triggered by an acquisition. The purchase price is allocated to the assets and liabilities included in the transaction. Buyers and sellers often have different agendas for assigning value to certain assets. In addition, there are nuances to financial reporting versus tax reporting.
For US deals, the FASB ASC 805 and 350 (as updated) provide guidance to complete a PPA for financial reporting purposes. These rules apply to all transactions (change of control), whether an asset or stock purchase. The tax reporting under Sections 1060 and 338 provide regulations for asset transactions only. Section 338 (h)(10) allows for certain stock acquisitions to be treated as asset deals. Section 754 relates to entities structured as LLCs and partnerships.
A recent valuation assignment for The Mentor Group included aspects of both financial and tax reporting for the buyer. Many advisors insist that an asset allocation be included as part of the acquisition agreement. Since buyers and sellers can disagree, a deal can occur without this attachment. And each party can submit an asset allocation with its separate tax return. We were hired after the deal closed and without a buyer/seller agreed upon Form 8594 (part of IRC Section 1060).
For the buyer, we first performed a PPA for financial purposes, since the requirements are more stringent. The premise of value was "fair value," based upon a piece known or extrapolated from orderly market transactions. In contrast, tax regulations mandate "fair market value". The PPA for book purposes in the case at hand differed from the tax allocation in these ways:
- Contingent consideration and liabilities were measured at fair value. These were not included for tax.
- The debt was measured at fair value, while the face value was accepted for tax.
- For financial purposes, the tax amortization benefit of the intangible assets was included; under tax reporting, this amortization is only used in the valuation if the amount is deductible, which it was for our client.
- Lastly, we allocated values to the reporting units for book purposes; conversely, the tax allocation was constructed at the legal entity levels.
Our PPA valuations are performed for both buyers and sellers. At times, we are hired to complete the Form 8594 before a transaction is finalized.