Purchase Price Allocation (PPA)

Step 1: Fair Value of Net Identifiable Assets

Fair Value of Net Identifiable Assets = Book Value of Net Assets + PP&E Step-Up + Intangible Step-Up

Fair Value of Net Identifiable Assets = $400.0m + $60.0m + $40.0m = $500.0m

This is what the target's assets and liabilities are actually worth once restated to fair value at the acquisition date, rather than left at their historical (book) carrying values. It's the figure that gets pushed down onto the combined balance sheet, not the number on the target's pre-deal balance sheet.

Step 2: Goodwill

Goodwill = Purchase Price - Fair Value of Net Identifiable Assets

Goodwill = $650.0m - $500.0m = $150.0m

Goodwill is the plug that captures everything the acquirer paid for beyond the identifiable, fair-valued assets — synergies, assembled workforce, market position, and sometimes simple overpayment. Unlike PP&E or intangibles, goodwill is not amortized under current US GAAP or IFRS; it sits on the balance sheet indefinitely and is tested at least annually for impairment.

Step 3: Incremental Annual D&A from Step-Ups

Incremental Annual D&A = (PP&E Step-Up / PP&E Useful Life) + (Intangible Step-Up / Intangible Useful Life)

Where: PP&E Step-Up = $60.0m over 10 years, Intangible Step-Up = $40.0m over 8 years.

Plugging in the values: PP&E piece = $60.0m / 10 = $6.0m; Intangible piece = $40.0m / 8 = $5.0m.

Incremental Annual D&A = $6.0m + $5.0m = $11.0m per year

This is new depreciation and amortization that didn't exist on either company's standalone income statement before the deal — it's created purely by writing the acquired assets up to fair value. It runs through EBIT for as long as each step-up amortizes (10 years for the PP&E piece, 8 years for the intangible piece), then drops off once each asset is fully written down.

Step 4: After-Tax Earnings Impact

After-Tax Earnings Impact = Incremental Annual D&A x (1 - Tax Rate)

Using the incremental annual D&A ($11.0m) and the acquirer's tax rate (25%, or 0.25):

After-Tax Earnings Impact = $11.0m x (1 - 0.25) = $8.25m reduction in net income per year

Because this deal is structured so the step-up amortization is tax-deductible, roughly a quarter of the D&A burden is offset by lower cash taxes, leaving $8.25m as the net hit to earnings. This is the number equity research analysts and integration teams watch when building post-merger EPS estimates, since it directly reduces reported net income relative to the pre-deal combined entity.

Final Results

• Fair Value of Net Identifiable Assets: $500.0m
• Goodwill: $150.0m
• Incremental Annual D&A: $11.0m
• After-Tax Earnings Impact: $8.25m reduction in net income per year

These figures feed directly into the pro-forma income statement of an accretion/dilution model — the incremental D&A is exactly the kind of deal-specific adjustment that separates a quick EPS accretion estimate from a properly modeled one.

Would you like to walk through how this changes if the acquirer instead structures the deal as a straight stock purchase with no tax basis step-up?