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Mergers and acquisitions are often evaluated based on headline metrics such as purchase consideration, projected synergies and the historical profitability of the company being acquired (the Target). However, many acquirers only fully appreciate the accounting impact of a transaction after completion, when the purchase price allocation (PPA) exercise is performed for financial reporting purposes.
One of the most common post-acquisition surprises is the difference between the Target’s reported profits prior to acquisition and the profits that are ultimately consolidated into the acquirer’s group financial statements. This difference is frequently driven by the recognition and amortisation of intangible assets identified during the PPA process.
Common examples of identifiable intangible assets include:
While the recognition of these assets provides greater transparency over the value drivers of the acquired business, it also introduces non-cash amortisation charges in future periods, which directly affect consolidated profits.
Based on this, the annual amortisation expense would be:
RM20 million ÷ 10 years = RM2 million per annum
Post-acquisition, the Group’s consolidated profit would look like this:
Although the Target continues to generate RM10 million in PAT, only RM8.5 million is reflected at the Group level after PPA-related amortisation. This outcome may catch management and boards off guard, particularly when the acquisition was justified based on earnings accretion derived from the Target’s reported PAT of RM10.0 million.
Another common misconception is that all “excess” purchase price consideration automatically becomes goodwill. In practice, identifiable intangible assets, such as brand names, customer relationships, order backlogs and contractual rights, are first recognised separately from goodwill during the PPA exercise.
Identifiable intangible assets with finite useful lives are typically amortised over their useful lives, which reduces reported earnings over time. In contrast, goodwill is not amortised but is instead subject to annual impairment testing under MFRS 136.
As a result, two acquisitions with the same purchase consideration and Target profits, but different business or operating profiles, can have very different post-deal earnings outcomes depending on the nature and value of intangible assets recognised during the PPA exercise.
In many cases, these issues could have been anticipated earlier with better visibility over PPA outcomes.
However, from an accounting perspective, identifiable intangible assets with finite useful lives must be systematically amortised over their useful lives, and in certain cases may also be subject to impairment assessments. Accordingly, the impact on reported earnings cannot be ignored.
Understanding this distinction early assists the boards and management to:
By considering PPA implications early — particularly the recognition and amortisation of intangible assets and the potential impairment risk associated with goodwill — acquirers can make better-informed decisions, avoid post-completion surprises, and ensure that the transaction delivers value not only in substance, but also in reported financial results.
Given the technical complexity involved in a PPA exercise and the application of financial reporting requirements under MFRS 3 Business Combinations, MFRS 138 Intangible Assets and other applicable financial reporting standards, management and boards should seek advice from professionals with deep technical expertise in the relevant accounting and financial reporting standards, as well as extensive experience in intangible asset valuation.
If you would like to better understand the potential PPA implications of a proposed transaction, or require assistance with pre-deal or post-acquisition PPA assessments, please feel free to contact our BDO specialists. Our team would be pleased to discuss how we can support management and boards in navigating these considerations.
Contact:
Eng Cha Lun (engcl@bdo.my)
Hasanuddin bin Amiruddin (hasanuddin@bdo.my)
Learn More
One of the most common post-acquisition surprises is the difference between the Target’s reported profits prior to acquisition and the profits that are ultimately consolidated into the acquirer’s group financial statements. This difference is frequently driven by the recognition and amortisation of intangible assets identified during the PPA process.
Why PPA Matters Beyond Compliance
Under MFRS 3 Business Combinations, an acquirer is required to allocate the purchase consideration to identifiable assets acquired and liabilities assumed at fair value as at the acquisition date. This includes not only tangible assets such as property, plant and equipment, but also intangible assets that may not have been previously recognised in the Target’s financial statements.Common examples of identifiable intangible assets include:
- Customer relationships
- Contractual rights or order backlogs
- Brands or trade names
- Patented or unpatented technology
While the recognition of these assets provides greater transparency over the value drivers of the acquired business, it also introduces non-cash amortisation charges in future periods, which directly affect consolidated profits.
A Simple Illustration: When PAT Is Not Fully Reflected at Group Level
Consider the following simplified example:- Target’s Profit After Tax (PAT): RM10 million per annum
- Intangible asset identified during the PPA exercise: Customer relationship valued at RM20 million
- Useful life assessed at 10 years
Based on this, the annual amortisation expense would be:
RM20 million ÷ 10 years = RM2 million per annum
Post-acquisition, the Group’s consolidated profit would look like this:
| Description | RM million |
|---|---|
| Target's reported PAT | 10.0 |
| Less: amortisation of customer relationships (net of tax) | (1.5)* |
| Net consolidated PAT contribution | 8.5 |
| *The net impact of RM1.5 million is derived from amortisation of RM2.0 million per annum, less the corresponding tax effect of RM0.5 million. |
Although the Target continues to generate RM10 million in PAT, only RM8.5 million is reflected at the Group level after PPA-related amortisation. This outcome may catch management and boards off guard, particularly when the acquisition was justified based on earnings accretion derived from the Target’s reported PAT of RM10.0 million.
Goodwill Is Not the Only Adjustment
Another common misconception is that all “excess” purchase price consideration automatically becomes goodwill. In practice, identifiable intangible assets, such as brand names, customer relationships, order backlogs and contractual rights, are first recognised separately from goodwill during the PPA exercise. Identifiable intangible assets with finite useful lives are typically amortised over their useful lives, which reduces reported earnings over time. In contrast, goodwill is not amortised but is instead subject to annual impairment testing under MFRS 136.
As a result, two acquisitions with the same purchase consideration and Target profits, but different business or operating profiles, can have very different post-deal earnings outcomes depending on the nature and value of intangible assets recognised during the PPA exercise.
Why This Matters to Boards and Management
As the PPA exercise is performed post-acquisition for financial reporting purposes, the resulting impact on reported earnings may not be fully visible during the deal evaluation stage unless management performs an early assessment of the potential PPA implications. Post-acquisition PPA adjustments can have wider implications beyond accounting:- Impact on Reported Earnings
- Budgeting and Forecasts
- Dividend Capacity
- Investor Communication
In many cases, these issues could have been anticipated earlier with better visibility over PPA outcomes.
Benefits of a Pre-Deal PPA Assessment
A pre-deal PPA assessment allows management and boards to understand the likely accounting impact of an acquisition before completion. While preliminary in nature, it provides valuable insights into:- The expected split between identifiable intangible assets and goodwill
- Indicative amortisation charges post-acquisition
- The difference between Target-level profits and Group-level consolidated profits
- Sensitivity of earnings to changes in useful lives or valuation assumptions
Balancing Commercial and Accounting Realities
From a commercial perspective, recognising intangible assets does not mean the business is performing worse. In fact, it often reflects the value of its intangible assets e.g. strong customer relationships, contracts, or brands that underpin future cash flows.However, from an accounting perspective, identifiable intangible assets with finite useful lives must be systematically amortised over their useful lives, and in certain cases may also be subject to impairment assessments. Accordingly, the impact on reported earnings cannot be ignored.
Understanding this distinction early assists the boards and management to:
- Assess the purchase consideration
- Set realistic performance expectations
- Communicate effectively with stakeholders
Conclusion
Purchase price allocation is more than a post-deal compliance exercise. It has a direct and sometimes material impact on post-acquisition earnings, key financial metrics, and stakeholder perceptions.By considering PPA implications early — particularly the recognition and amortisation of intangible assets and the potential impairment risk associated with goodwill — acquirers can make better-informed decisions, avoid post-completion surprises, and ensure that the transaction delivers value not only in substance, but also in reported financial results.
Given the technical complexity involved in a PPA exercise and the application of financial reporting requirements under MFRS 3 Business Combinations, MFRS 138 Intangible Assets and other applicable financial reporting standards, management and boards should seek advice from professionals with deep technical expertise in the relevant accounting and financial reporting standards, as well as extensive experience in intangible asset valuation.
If you would like to better understand the potential PPA implications of a proposed transaction, or require assistance with pre-deal or post-acquisition PPA assessments, please feel free to contact our BDO specialists. Our team would be pleased to discuss how we can support management and boards in navigating these considerations.
Contact:
Eng Cha Lun (engcl@bdo.my)
Hasanuddin bin Amiruddin (hasanuddin@bdo.my)
Learn More