As an M&A analyst, you are tasked with walking through the purchase accounting for an acquisition — calculating the fair value step-ups, the deferred tax liability they create, the resulting goodwill, the incremental amortization burden, and the deferred revenue haircut's impact on post-close revenue.

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As an M&A analyst, you are tasked with walking through the purchase accounting for an acquisition — calculating the fair value step-ups, the deferred tax liability they create, the resulting goodwill, the incremental amortization burden, and the deferred revenue haircut's impact on post-close revenue.

1. Task Overview
Task: apply purchase accounting to an acquisition — compute the fair value of net identifiable assets acquired, the resulting goodwill, the incremental annual depreciation/amortization burden from the fair value step-ups, and the deferred revenue haircut's effect on post-close revenue.

Step 1: Given Data — Deal Terms and Target's Book Balance Sheet
An acquirer pays a purchase price for a target and now needs to allocate that price under purchase accounting (ASC 805 / IFRS 3).

Line ItemValue
  
    Purchase Price (all-cash)$500.0m
    Net Working Capital (book value)$50.0m
    PP&E (book value)$100.0m
    PP&E (fair value)$130.0m
    PP&E Remaining Useful Life10 years
    Other Identifiable Assets (book value)$20.0m
    New Intangible Asset — Customer Relationships (fair value, not on Target's books)$80.0m
    Customer Relationships Useful Life8 years
    Total Liabilities excl. Deferred Revenue (book value ≈ fair value)$60.0m
    Deferred Revenue (book value)$10.0m
    Deferred Revenue (fair value)$4.0m
    Tax Rate25% (0.25)

Step 2: Deferred Tax Liability from the Fair Value Step-Ups
In a stock deal, think about what happens when the book (GAAP) basis of an asset is stepped up to fair value but the tax basis stays at the seller's historical cost.
Show DTL FormulaDTL = (PP&E Step-Up + New Intangible Asset) × Tax Rate
Using this formula, compute the deferred tax liability created by the step-ups.

Step 3: Fair Value of Net Identifiable Assets Acquired
Purchase accounting requires restating every identifiable asset and liability to fair value, including the DTL from Step 2 and the deferred revenue haircut.
Show Net Identifiable Assets FormulaFV of Net Identifiable Assets = (NWC + PP&E at FV + Other Assets + New Intangible) − (Other Liabilities + Deferred Revenue at FV + DTL)
Using this formula, compute the fair value of net identifiable assets acquired.

Step 4: Goodwill Created
Goodwill is the plug — whatever the acquirer paid above the fair value of everything it can separately identify.
Show Goodwill FormulaGoodwill = Purchase Price − FV of Net Identifiable Assets Acquired
Using this formula, compute the goodwill created by the deal.

Step 5: Incremental Amortization Burden and the Deferred Revenue Haircut
Show Incremental D&A and Haircut FormulasIncremental Annual D&A = (PP&E Step-Up ÷ Useful Life) + (New Intangible ÷ Useful Life)Deferred Revenue Haircut = Deferred Revenue (Book Value) − Deferred Revenue (Fair Value)
Assume:

The PP&E step-up depreciates straight-line over its remaining useful life of 10 years
  The Customer Relationships intangible amortizes straight-line over 8 years
  The remaining performance obligation underlying the deferred revenue balance is fully satisfied within the first year post-close

Using these inputs, compute the incremental annual depreciation and amortization burden the combined company will carry going forward, and the amount of revenue that will never be recognized because of the deferred revenue haircut.

Purchase Accounting After an Acquisition

📋 What you're given

1. Task Overview

Step 1: Given Data — Deal Terms and Target's Book Balance Sheet

Step 2: Deferred Tax Liability from the Fair Value Step-Ups

Step 3: Fair Value of Net Identifiable Assets Acquired

Step 4: Goodwill Created

Step 5: Incremental Amortization Burden and the Deferred Revenue Haircut

💡 Model answer

Step 1: Deferred Tax Liability from the Fair Value Step-Ups

Step 2: Fair Value of Net Identifiable Assets Acquired

Step 3: Goodwill Created

Step 4: Incremental Amortization Burden and the Deferred Revenue Haircut

Final Results

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Line Item	Value
Purchase Price (all-cash)	$500.0m
Net Working Capital (book value)	$50.0m
PP&E (book value)	$100.0m
PP&E (fair value)	$130.0m
PP&E Remaining Useful Life	10 years
Other Identifiable Assets (book value)	$20.0m
New Intangible Asset — Customer Relationships (fair value, not on Target's books)	$80.0m
Customer Relationships Useful Life	8 years
Total Liabilities excl. Deferred Revenue (book value ≈ fair value)	$60.0m
Deferred Revenue (book value)	$10.0m
Deferred Revenue (fair value)	$4.0m
Tax Rate	25% (0.25)