By Eng Cha Lun, Executive Director, Advisory, BDO Malaysia
Hasanuddin bin Amiruddin, Director, Advisory, BDO Malaysia
Mergers and acquisitions (M&A) are often assessed through headline indicators such as purchase price, expected synergies and the historical profitability of the target company.
However, many acquirers only fully understand the financial reporting implications of a transaction after completion, when the purchase price allocation (PPA) exercise is carried out.
One of the most common post-acquisition surprises is the gap between the target company’s reported profit before acquisition and the profit contribution ultimately reflected in the acquirer’s consolidated financial statements.
This difference is often driven by the recognition and subsequent amortisation of intangible assets identified during the PPA process. PPA Is More Than an Accounting Requirement
Under MFRS 3 Business Combinations, an acquirer must allocate the purchase consideration paid for a business combination to identifiable assets acquired and liabilities assumed at fair value on the acquisition date.
This allocation goes beyond physical assets such as property, plant and equipment.
It also includes intangible assets that may not have previously appeared on the target company’s balance sheet, such as:
- Customer relationships;
- Contractual rights and order backlogs;
- Brands and trade names; and
- Proprietary technology.
While recognising these intangible assets provides a clearer picture of what drives the value of an acquired business, it can also introduce future non-cash amortisation expenses that affect reported earnings.
When Strong Target Earnings Do Not Fully Translate After Acquisition
A company may appear attractive because of its strong historical profitability. However, after acquisition, the acquirer’s reported earnings may be lower than expected due to PPA-related adjustments.
For example, assume:
- Target’s annual profit after tax (PAT): RM10 million;
- Customer relationship intangible asset identified during PPA: RM20 million;
- Useful life: 10 years.
The annual amortisation expense would amount to RM2 million.
After taking into account the tax effect, the net impact could reduce the group’s consolidated PAT contribution from RM10 million to approximately RM8.5 million.
Although the acquired business continues generating the same underlying profit, the accounting treatment reduces the earnings reflected at group level.
This difference can affect management expectations, investor communication and valuation assessments.
Goodwill Is Not the Only Consideration
A common misconception is that any excess purchase consideration automatically becomes goodwill.
In reality, identifiable intangible assets are recognised separately before goodwill is determined.
Assets such as customer relationships, brands, contracts and technology may be assigned individual values if they meet recognition criteria.
Unlike finite-lived intangible assets, goodwill is not amortised. Instead, it is subject to annual impairment testing under MFRS 136.
This means two acquisitions with identical purchase prices and target earnings can have very different post-deal earnings outcomes depending on the nature of intangible assets recognised.
Why Boards Need Visibility Before Completing Deals
Because PPA is typically performed after an acquisition is completed, boards and management may not fully appreciate its potential impact during the negotiation stage.
A transaction that appears earnings accretive based on the target’s reported PAT may deliver lower reported earnings after consolidation.
The implications extend beyond financial reporting.
Earnings expectations
Post-acquisition earnings may differ from initial forecasts once amortisation charges are included.
Budgeting and forecasting
Management projections may not fully capture future PPA-related expenses, creating variances between expected and actual performance.
Dividend capacity
Lower reported earnings may influence dividend-paying ability or compliance with financial covenants, even where the underlying cash flow generation remains healthy.
Investor communication
Differences between operational performance and reported earnings may require clearer explanations to shareholders and the market.
The Case for Pre-Deal PPA Assessment
A pre-deal PPA assessment allows acquirers to estimate the likely accounting impact before finalising a transaction.
Although preliminary, it provides valuable insight into:
- The likely allocation between identifiable intangible assets and goodwill;
- Potential future amortisation charges;
- Differences between target-level and group-level earnings; and
- Sensitivity to valuation assumptions and useful lives.
Importantly, a pre-deal assessment does not replace the final PPA required after completion.
Instead, it helps decision-makers evaluate whether the transaction structure, valuation and expected returns remain attractive after accounting considerations are taken into account.
Bridging Commercial Value and Accounting Reality
The recognition of intangible assets should not necessarily be viewed negatively.
In many cases, it reflects the very strengths that make an acquisition attractive — strong customer relationships, valuable contracts, established brands or proprietary technology.
However, these assets may have finite useful lives and require systematic amortisation, which affects reported profitability.
Understanding this distinction early enables boards and management to:
- Assess purchase consideration more effectively;
- Set realistic performance expectations; and
- Communicate transparently with stakeholders.
- Conclusion: Avoiding Post-Deal Surprises
Purchase price allocation is not merely a post-acquisition compliance exercise. It can materially influence earnings, financial metrics and stakeholder perceptions.
By considering PPA implications early — including intangible asset recognition, amortisation effects and goodwill impairment risks — acquirers can make better-informed decisions and improve the likelihood that an M&A transaction delivers sustainable value.
As M&A transactions become increasingly complex, management and boards should consider engaging specialists with expertise in financial reporting standards, intangible asset valuation and transaction advisory services to assess potential PPA impacts before deals are completed.
