Purchase Price Allocation (PPAs) are required for every controlling transaction wherein the acquirer complies with Generally Accepted Accounting Principles (“GAAP”), with varying complexity based on the entities and/or assets involved in the transaction.
If the transaction does not meet the definition of a business, the transaction is accounted for as an asset acquisition. Most real estate acquisitions will be recorded as Asset Acquisitions rather than Business Combinations as ASU 2017-01 implementation rolls out effective as of 01-01-2019 mostly. The language of ASC 805 sets out the rules for identifying and separately measuring all identifiable assets and liabilities present in an acquisition.
According to ASC 820, fair value is defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
PPAs can be done for the Financial Reporting purpose or Tax Reporting purpose, or it can be applied to both purposes with different outcomes.
► Allocate the cost of the acquisition to individual asset components acquired and liabilities assumed on a relative fair value basis as discussed in ASC 805-50-30-3
► Cost of the acquisition = purchase price plus direct acquisition costs
► Goodwill and bargain purchase gains are not recognized in asset acquisitions.
The buyer of an institutional multi-tenant office building or regional mall is not only purchasing the underlying land and the bricks & mortar, it is also acquiring all lease contracts in place, along with the various implications driven by those contracts.
As income-generating properties, the appropriate methodology varies to best reflect market participant application. As such, the property is typically valued on an as-vacant basis via the cost and income approaches. A cost approach is first modeled, which appropriately values the land and improvements with no consideration of leases in place.
The cost approach is supported by a ‘go-dark’ income analysis, which capitalizes the future income stream associated with the property, but under the hypothetical scenario of complete vacancy, so as to exclude any contribution from the leases in place (which are valued separately). The sales comparison approach is also employed, but primarily as
support to the Fair Value conclusion of the individual tangible and intangible assets
in aggregate. This is due to the leased fee nature of similar investment-grade
transactions, in which all real property assets are conveyed in one bundle or rights.