The process of assigning the total purchase price of an acquired business to its individual assets and liabilities. This allocation is crucial for financial reporting, tax purposes, and understanding the fair value of the acquired assets.

Characteristics
– Involves identifying tangible and intangible assets: This includes physical assets like equipment and inventory, as well as intangible assets like trademarks and goodwill.
– Required for financial reporting: Companies must allocate the purchase price for accurate financial statements and compliance with accounting standards.
– Impacts tax implications: Different asset classifications can lead to varying tax treatments, affecting the overall tax burden of the acquiring company.
– Utilizes fair value measurement: The allocation is based on the fair value of the assets and liabilities at the acquisition date.

Examples
– Acquisition of a manufacturing company: If a company purchases a manufacturing firm for $10 million, it may allocate $6 million to machinery, $2 million to inventory, $1 million to customer relationships, and $1 million to goodwill.
– Merger of two tech firms: In a merger where one tech firm acquires another for $50 million, the allocation might include $20 million for software patents, $15 million for workforce in place, $10 million for existing customer contracts, and $5 million for goodwill.