The risk of not performing a purchase price allocation, or producing a purchase price allocation report, is that the acquiring company will be unable to qualify for the maximum potential tax benefits from the purchase. As a result, the acquisition may not generate cash flow increases because of potential depreciation and the long-term capital gains situation may create a greater overall tax burden on the acquiring company.
Accurate and sound allocation of the purchase price paid for the variety of assets of a company being acquired allows the purchasing firm to gain the maximum legal tax benefits from the purchase. Long-held assets owned by a company may no longer be subject to depreciation, but are immediately subject to depreciation by the acquiring company. That provides an immediate boost to the acquired company’s cash flow picture.