Purchase Price Allocation

---
name: purchase-price-allocation
description: Allocates consideration across identifiable assets, intangibles, and goodwill under the acquisition method and shows the amortization drag on reported post-deal earnings.
---

# Purchase Price Allocation Agent

## When to use
Use this when a deal is signed or modeled and the accounting consequence of the price has to be shown: the opening balance sheet, pro-forma earnings, or the gap between reported and adjusted EPS. Reach for it when a merger model needs deal amortization, or a board asks why accretion on cash earnings becomes dilution on reported earnings.

## What it does
It produces an allocation of consideration under the acquisition method: tangible assets and assumed liabilities stepped to fair value, identifiable intangibles valued and given lives, deferred tax on the step-up, goodwill as the residual, and the amortization charge run through post-deal earnings.

## Method
1. Measure the consideration at fair value. Total what was transferred.
   - Cash, stock at the closing price on the acquisition date, contingent consideration at fair value, and the pre-combination portion of replacement awards, measured by the accounting acquirer, which in a reverse acquisition is not the legal one.
   - Transaction costs are expensed, never capitalized into consideration; it is the commonest error in a first-pass allocation.

2. Step tangible assets and assumed liabilities to fair value. Restate the balance sheet.
   - Inventory, property and equipment, leases, and assumed debt at fair value; flag the inventory step-up, which burns through cost of sales within a year and flatters the next one.

3. Identify the separable intangibles. Apply the recognition test.
   - Recognize what is contractual or legal, or separable and capable of being sold: customer relationships, developed technology, trade names, backlog, non-competes.
   - An assembled workforce fails the test and stays in goodwill, however much the buyer paid for the team.

4. Value each intangible on the right approach. Match method to asset.
   - Multi-period excess earnings for the primary income-generating asset, relief from royalty for trade names and technology, with-and-without for non-competes.
   - Reconcile the weighted average return on assets against WACC and the deal IRR; a WARA far from WACC means the allocation or the price is wrong.

5. Set useful lives and the amortization pattern. Anchor lives in evidence.
   - Take customer-relationship life from measured attrition and technology life from the release cycle, then match the pattern to how the benefit is consumed.

6. Recognize deferred tax and plug goodwill. Close the allocation.
   - With no tax basis step-up, book a deferred tax liability at the marginal rate on the intangible step-up, which grosses up goodwill; goodwill is consideration less net identifiable assets.

7. Show the earnings drag. Report both bases.
   - Run after-tax amortization through pro-forma earnings by year, noting that short-life assets such as backlog drop out quickly and that goodwill is not amortized but tested for impairment.
   - A deal can be accretive on adjusted earnings and dilutive on reported earnings at once; always say which basis a headline number is on.

## Inputs
- Total consideration and its components, including any earnout
- The target's closing balance sheet and its tax bases
- Fair value evidence: appraisals, royalty rates, attrition data
- Revenue and margin forecasts by asset, for the excess-earnings model
- The marginal tax rate and the deal model's discount rates
- Acquirer share count and pre-amortization earnings

## Output format
- Consideration at fair value, component by component
- Net tangible assets at fair value, with each step-up identified
- An intangible schedule in prose: asset, approach, value, and useful life
- The deferred tax liability, the rate applied, and goodwill as the residual, tied back to consideration
- Annual amortization and the after-tax effect on reported earnings per share
- Present all schedules in prose, never as markdown tables

## Example
For Calderon Software's purchase of Ridgeway Analytics (fictional, illustrative): consideration is 900 in cash. Net tangible assets at fair value are 120: working capital of 60 and property of 90 less assumed debt of 30. Identifiable intangibles total 450, being customer relationships of 240 on multi-period excess earnings over ten years, technology of 150 on relief from royalty over six, a trade name of 40 over five, and backlog of 20 over one. A deferred tax liability at 25 percent adds 113, so net identifiable assets are 457 and goodwill is the residual 443, or 49 percent of the price. Amortization is 77 in year one and 57 thereafter, or 57.75 and 42.75 after tax. Against combined pre-amortization earnings of 300 on 100 million shares, reported EPS falls from 3.00 to 2.42 in year one, a 19 percent drag, recovering to 2.57 once backlog is written off.