Typically, consideration of the potential intangible assets acquired as part of a transaction is only undertaken post completion as part of a formal purchase price allocation (PPA), which is required for financial reporting purposes. However, understanding the impact on earnings per share (EPS) of assets acquired is important at all stages of a deal, not just post completion and will help to avoid surprises.
One of the primary concerns for Board decision makers at the deal assessment stage, is whether the deal will be EPS accretive or dilutive. Acquisition of intangibles which amortise to the P&L (such as software or customer arrangements) whilst being non-cash will impact earnings and therefore EPS. Early consideration of such impacts enable strategic communication to shareholders and assist in managing expectations post deal execution.
Identifying intangibles pre-deal can also assist in identifying value drivers of a transaction, facilitating a more informed negotiation process. The negotiation stage of a deal should be confirmatory in nature on any EPS impacts and include consideration of any legal and structural changes that will result post execution, causing a potential impact on EPS.
Post execution financial reporting
Australian accounting standards require buyers to allocate the consideration paid in a business acquisition to all assets acquired and liabilities assumed, including both tangible and intangible assets, within 12 months of acquisition whilst other reporting deadlines may arise sooner. Performing preliminary PPA analysis prior to completion avoids needing to bridge large gaps between provisional accounting purposes and PPA finalisation, again avoiding any adverse surprises to shareholders.
Stay tuned for Part 2 of our series which will explore PPA complexities.