Consolidation Post-Acquisition — Amortizing and Testing Identifiable Net Assets

After the initial consolidation at the acquisition date, the parent must continue accounting for the acquired net assets by amortizing finite-lived intangibles, depreciating step-ups to fixed assets, and testing indefinite-lived intangibles for impairment.

These adjustments affect both consolidated net income and the carrying value of the acquired business over time.

1. Post-acquisition accounting for identifiable net assets

Once the fair values of acquired assets and liabilities are established at acquisition (T 0), they become the new bases for post-acquisition accounting. This includes:

• Depreciation of property, plant, and equipment based on revised useful lives.

• Amortization of intangible assets with finite lives.

• No amortization of indefinite-lived intangibles (such as trademarks) but annual impairment testing is required.

These adjustments impact consolidated expenses, deferred tax balances, and segment results.

2. Amortization of intangible assets

Type of Intangible	Typical Useful Life	Amortization Method
Customer relationships	5–15 years	Straight-line or income-based
Non-compete agreements	Contractual term	Straight-line
Technology and patents	3–10 years	Straight-line or usage-based
Order backlog	Period of contract completion	Accelerated or straight-line

Amortization expense is reported within consolidated operating income.

3. Depreciation of fixed asset fair-value step-ups

When fixed assets are revalued above their book value at acquisition, the new basis is depreciated over the asset’s remaining useful life.

Example:

Book value of machinery: $600,000Fair value at acquisition: $900,000

Remaining useful life: 5 years

Annual depreciation on step-up = ($900K – $600K) ÷ 5 = $60,000

This incremental expense reduces post-acquisition earnings.

4. Impairment testing of indefinite-lived intangibles

Assets such as trademarks or broadcast rights are tested annually for impairment or more frequently if there is a triggering event.

Steps:

1. Determine recoverable amount (fair value less costs of disposal or value in use).

2. Compare with carrying amount.

3. If carrying amount exceeds recoverable amount, recognize impairment loss.

Impairment losses reduce the asset's carrying amount and flow through the income statement.

5. Deferred tax implications

Fair-value adjustments to net assets may create temporary differences, resulting in deferred tax assets (DTAs) or liabilities (DTLs).

Fair-Value Adjustment	Tax Treatment	Deferred Tax Impact
Step-up in PPE or intangibles	Not deductible for tax	Creates DTL
Recognized provisions or liabilities	Not taxable until settled	Creates DTA
Contingent liabilities	May differ in timing/recognition	DTA or DTL depending on nature

Deferred taxes must be tracked and updated for changes in tax law, tax basis, or realizability.

6. Impact on consolidated financial statements

Income Statement:

• Higher amortization and depreciation expense post-acquisition

• Possible impairment charges on intangible assets

Balance Sheet:

• Gradual decline in carrying value of amortizable assets

• Deferred tax balances change with timing differences

Equity:

• Retained earnings reflect lower income due to amortization and depreciation

• Non-controlling interests adjust based on proportionate shares of post-acquisition profit and OCI

7. Ongoing reporting and disclosures

Entities must disclose:

• Remaining useful lives and amortization policies for material intangibles

• Impairment tests performed on indefinite-lived assets and the outcome

• Significant changes in deferred tax balances tied to acquisition accounting

• Reconciliations of intangible and fixed asset balances post-acquisition

Example disclosure note:

“Following the acquisition of XYZ Ltd., the Group recognized $45 million in customer relationships, which are being amortized over 12 years on a straight-line basis. As of year-end, the carrying amount was $41.25 million. No impairment indicators were noted.”

Key take-aways

• Amortization and depreciation based on fair values reduce post-acquisition income but reflect more accurate economic value.

• Indefinite-lived intangibles are not amortized but must be tested annually for impairment.

• Deferred tax assets and liabilities must be established and tracked as a result of fair-value adjustments.

• Clear disclosures and tracking schedules are essential to monitor and explain the post-acquisition behavior of net assets.