Purchase Price Allocation Calculator

When one company buys another, the price arrives as a single number. The buyer does not get a single thing for it. It gets cash in the bank, receivables, stock on the shelves, machines, buildings, a customer list, a name people recognize, and promises it must now keep to lenders and suppliers. Accounting and tax law both insist that the one number be broken back down into those pieces. They do it for different reasons, with different inputs, and they rarely agree on the last piece.

That last piece is goodwill. It is never measured directly. It is whatever is left once everything that can be named and valued has been named and valued, and that is the point worth holding on to. Goodwill is a remainder, and every error or judgment made upstream lands in it.

The book view: price against net identifiable assets

Financial reporting under US rules follows the acquisition method in the accounting standard known as ASC 805, and international reporting follows its counterpart, IFRS 3. The bank regulators’ glossary for the quarterly Call Report summarizes the US method in plain terms. The buyer measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest at their fair values on the acquisition date. What the buyer gave up is measured the same way: cash and other assets handed over, liabilities incurred to the former owners, and equity interests issued, each at fair value.

Goodwill is then the excess of what was given, plus the fair value of any non-controlling interest, over the net of the identifiable assets and the liabilities assumed. If the buyer already owned part of the target before taking control, that earlier stake is remeasured at its fair value on the acquisition date, with any gain or loss going to earnings, and it joins the total on the same side as the price. The arithmetic is short. The work is in the inputs.

An earn-out is a common case. Part of the price is paid later only if the business hits targets, and on the acquisition date it is a promise to the former owners rather than cash. The calculator takes it as its own line at fair value, next to the cash and the equity, so its weight in the result stays visible.

“Identifiable” carries a lot of weight. The glossary says an intangible asset is recognized apart from goodwill if it comes from contractual or legal rights, or if it could be separated and sold, licensed or exchanged on its own. Trade names, customer relationships, servicing rights and non-compete agreements all qualify. Whatever value cannot be pinned to such an asset stays inside goodwill. The Wikipedia article on goodwill puts the same idea in words a buyer would use: the premium paid over the net value of the other assets, often a reflection of the ability to win and keep customers.

The step-ups create one more line. Assets written up to fair value usually keep their old tax basis, so the books carry them at more than the tax return will ever deduct. The glossary notes that a deferred tax liability is recognized for these differences. A deferred tax liability reduces net identifiable assets, which makes goodwill larger. The calculator offers a simple version of this line, one rate times the gap between fair value and tax basis, and labels it as a simplification, because real deferred tax work runs asset by asset and jurisdiction by jurisdiction.

When the remainder is negative

Sometimes the identifiable net assets are worth more than everything given for them. That is a bargain purchase, and it is rare enough that the rules treat it with suspicion. Before anything is booked, the buyer has to go back and check that it identified every asset and every liability, and that it measured each one properly. Only an excess that survives that review is recognized, and it goes straight to earnings as a gain on the acquisition date.

This is the case the older calculator on this page got wrong. It subtracted assets from the price and, if the answer came out negative, quietly showed zero. A negative result is not an error to hide. It is either a real gain or a sign that something upstream is missing, and either way it deserves to be seen. The tool shows it as a bargain purchase gain with the reassessment note, and it never clamps it.

Goodwill on the books is not amortized by public companies under US rules or IFRS. It is tested for impairment at least once a year instead. Private companies in the United States may elect an alternative that amortizes it on a straight line over ten years or less. Either way, the number set on the acquisition date is the starting point for years of reporting.

The tax view: seven classes, filled in order

The tax rules ask a different question. They do not care about fair value in the reporting sense or about non-controlling interests. They care about the buyer’s cost basis in each asset, because basis drives depreciation, amortization and the gain or loss when an asset is sold later. IRS Publication 544 explains why the seller cares just as much: a business sold for a lump sum is treated as a sale of each asset separately, and the character of the gain differs by asset.

Section 1060 of the Internal Revenue Code requires both sides of an asset acquisition to allocate the consideration by the residual method of the regulations under section 338. The rule is in 26 CFR 1.338-6, applied to asset deals by 1.1060-1, and reads like an algorithm. Assets fall into Classes I to VII. Class I is cash and ordinary deposit accounts. Class II holds actively traded securities, certificates of deposit and foreign currency. Class III holds receivables and assets marked to market. Class IV is inventory. Class V is everything else, which in practice means equipment, buildings and land. Class VI holds the section 197 intangibles except goodwill. Class VII is goodwill and going concern value.

The consideration is first reduced by Class I. What remains goes to Class II up to its fair market value, then to Class III, then IV, V and VI, each capped at fair market value. Inside a class the amount is shared in proportion to the fair market values of its assets. Whatever is left at the end goes to Class VII. If the consideration runs out early, the class where it runs out is paid pro rata and every later class, goodwill included, gets nothing. If Class I alone is larger than the consideration, the regulation treats the excess as ordinary income.

Tax consideration also counts differently. In the second example of 1.1060-1 a buyer pays 3,000 in cash and assumes 1,000 of liabilities, and the consideration is 4,000. The parties agree values of 500 for securities, 200 for receivables, 2,200 for furniture, buildings, land and equipment and 900 for a covenant not to compete. That leaves 200 for Class VII. When an examiner later finds the covenant was worth only 500, the extra 400 does not spread across the other classes, which are already full. It drops into Class VII, which becomes 600.

A worked example you can reproduce

The regulation’s own first example is the cleanest test of any implementation. A target has 3,000 to allocate: 2,000 for its stock plus 1,000 of liabilities. It holds 200 of cash, 300 of traded securities, 600 of receivables, 300 of inventory, and in Class V a building at 800, land at 200 and an investment in a subsidiary at 450. Cash reduces the amount to 2,800. Securities, receivables and inventory each take their full value, leaving 1,600. Class V needs only 1,450, so each asset gets its value. The target has no Class VI assets, so Class VII receives 150.

Load the IRS rule preset in the tool and the same 150 appears, exact to the cent. The book view of that preset shows goodwill of 150 too, because nothing in it differs between the two views.

The opening example on this page is built to differ. Consideration is 1,500,000 in cash, 600,000 of equity at fair value and 125,000 of contingent consideration. Identifiable assets total 2,495,000 and liabilities 650,000. With a deferred tax line of 25 percent on 795,000 of step-ups, or 198,750, net identifiable assets come to 1,646,250 and book goodwill is 578,750.

On the tax side the buyer counts 2,100,000 paid, the same 650,000 of liabilities and 35,000 of capitalized costs, 2,785,000 in all. Every class from I to VI is paid in full and Class VII receives 290,000. The reconciliation explains the gap of 288,750 exactly: 198,750 of deferred tax and 125,000 of contingent consideration that exist only in the book view, less 35,000 of costs that exist only in the tax view.

Why the two numbers drift, and what a calculator cannot do

The two goodwill figures differ for structural reasons, not because one of them is wrong. The book view includes non-controlling interests and earlier stakes; the tax view of an asset purchase allocates only what the buyer pays and the liabilities it assumes. The book view measures an earn-out at fair value on day one; tax consideration follows when amounts are paid and is adjusted later. Deferred tax exists only on the books, and transaction costs are expensed for reporting but can raise tax cost.

Afterwards the paths split again. Under section 197 the tax goodwill is amortized ratably over 15 years from the month of acquisition, while the book goodwill of a public company sits on the balance sheet until an impairment test says otherwise.

The reporting is different too. Buyer and seller each file Form 8594, and its line for the allocation lists Classes VI and VII on a single line. Publication 551 adds that a written agreement between the parties on the allocation is binding on them unless the IRS finds it inappropriate, and the regulations say plainly that the IRS may challenge any fair market value. Public companies face their own disclosure: since 2021 the SEC’s pro forma rules require adjustments that depict the accounting for the acquisition that US GAAP or IFRS requires.

A calculator can do the arithmetic and prove it adds up. It cannot tell you what a customer list is worth, which class a disputed asset belongs in, whether a group of assets is a business, or how a later change in price must be spread. Those are valuation, legal and tax judgments, and they move the remainder far more than any rounding rule. Treat the numbers here as a check on your arithmetic and a way to see how the pieces fit, and take a real transaction to a qualified accountant, tax adviser or lawyer. This page is not accounting, tax or legal advice.