Purchase Accounting Step-Up: Depreciation & Amortization Impacts (IB Interview Guide)

Purchase Accounting Step-Up: Turning Fair Value into Incremental D&A

Purchase accounting is the post-deal accounting framework where the acquirer allocates the purchase price to the target’s identifiable assets and liabilities at fair value (often called the purchase price allocation, or PPA). The step-up is the difference between the target’s pre-close book carrying values and the new fair values recorded at close.

Why D&A changes after a step-up

A step-up matters for the income statement only if it creates (or increases) assets that are depreciated or amortized. In practice, two buckets drive the recurring impact:

• PP&E fair value write-up → incremental depreciation The buyer records PP&E at fair value. The incremental basis (fair value minus old net book value) is depreciated over the remaining useful life.

• Identifiable intangible assets recognized at fair value → incremental amortization Items like customer relationships, developed technology, trade names, and non-compete agreements are often recognized even if they weren’t on the target’s balance sheet before. These are typically amortized straight-line over assumed useful lives.

What does not create ongoing depreciation/amortization (common traps)

• Goodwill: generally not amortized under U.S. GAAP (impairment-tested). So it does not create recurring amortization expense.
• Inventory step-up: typically runs through COGS as the inventory sells (a temporary gross margin hit), not through D&A.
• Deferred revenue write-down: often reduces post-close revenue recognition; again, not D&A, but a separate purchase accounting impact candidates sometimes confuse with “amortization.”

The interview-level linkage (directionally correct, fast)

When step-up creates incremental D&A:

• EBITDA: usually unchanged (D&A is below EBITDA)
• EBIT / operating income: down by incremental D&A
• Taxes (simplified): down because taxable income is lower (subject to book vs. tax treatment)
• Net income: down by incremental D&A * (1 − tax rate)
• Operating cash flow (often, simplified): can be up due to the tax shield, even though GAAP net income is lower

That last bullet is the point interviewers care about: you can have accounting dilution (more amortization) while the deal’s cash economics are unchanged or improved.

A precise way to say it

“Purchase accounting step-up increases the depreciable/amortizable basis for certain assets. That raises non-cash D&A, lowering EBIT and GAAP earnings, and may reduce cash taxes—so cash flow can improve even when EPS falls.”

Technical Accounting Interview Questions: Explaining Purchase Accounting Impacts

In investment banking interview prep, purchase accounting is used to test whether you can keep the logic straight across the three statements and communicate it with deal-model intuition.

Typical prompts (paraphrased):

• Walk through the main purchase accounting impacts after an acquisition closes.
• Explain how purchase accounting affects depreciation in investment banking models.
• Why might EPS look worse after a deal even if EBITDA is unchanged?
• What’s the difference between PP&E write-up, intangible amortization, and goodwill?

What interviewers are evaluating

1. Classification accuracy: Do you know which PPA buckets hit D&A vs COGS vs revenue adjustments?
2. Incremental math: Can you compute incremental depreciation/amortization quickly from a write-up and a life assumption?
3. Statement linkage: Do you keep EBITDA vs EBIT vs net income consistent, and do you explain the tax effect correctly?
4. Modeling practicality: Can you describe how you’d implement it (incremental D&A schedule layered onto existing D&A) without drifting into unnecessary theory?

A tight answer structure that works live

Use a three-part structure that mirrors how bankers talk:

• (1) Allocation: “Step-up to PP&E creates more depreciation; identifiable intangibles create amortization; goodwill doesn’t amortize.”
• (2) Earnings: “Incremental D&A reduces EBIT and net income; EBITDA is unchanged.”
• (3) Cash: “Because D&A is non-cash, the main cash effect is lower taxes (if tax treatment aligns), so operating cash flow can increase.”

If the interviewer pushes for nuance, add it selectively: book amortization vs tax amortization differences, deferred taxes, and the fact that inventory step-up is a short-lived COGS headwind rather than recurring D&A. This is usually enough to cover amortization impacts in purchase accounting explained at the depth expected for technical rounds.

AceTheRound candidates typically do best when they verbalize the classification first (what hits where) and only then do the math—because most mistakes happen from putting the right number in the wrong line item.

Investment Banking Interview Prep Walkthrough: Modeling Depreciation and Amortization

Mini Case: Depreciation & Amortization Bridge After a Step-Up