Purchase Acquisition Accounting

Deciphering Purchase Acquisition Accounting: A Comprehensive Guide

Understanding the intricacies of purchase acquisition accounting is essential for businesses involved in mergers and acquisitions. From recording assets and liabilities to assessing fair market value, navigating the complexities of this accounting method requires careful consideration and adherence to regulatory guidelines.

Exploring Purchase Acquisition Accounting

Defining the Method

Purchase acquisition accounting involves reporting the purchase of a company on the balance sheet of the acquiring entity. Unlike pooling of assets, this method treats the acquired company as an investment, with its assets and liabilities added to the acquirer's balance sheet at fair market value.

Key Components

The excess amount paid by the acquirer over the net value of the target's assets and liabilities is classified as goodwill, which is amortized annually. This method has become the accepted standard for purchase accounting, often referred to as business combination accounting.

Understanding the Process

Guidelines and Documentation

Purchase acquisition accounting provides guidelines for recording acquisitions on consolidated financial statements. While most relevant to public companies with subsidiaries, these guidelines ensure accurate documentation of assets and liabilities.

Fair Market Valuation

Assets and liabilities, both tangible and intangible, are valued at fair market value, reflecting the price a third party would pay on the open market at the time of acquisition.

Comparing Accounting Methods

Alternative Approaches

If a business combination does not involve a strict takeover, other accounting methods may be allowed, such as pooling of interest or merger accounting. These methods have implications for future earnings and goodwill treatment.

Impact on Future Earnings

Using acquisition accounting results in the recognition of goodwill, which must be written off against future earnings, potentially impacting the financial performance of the entity.

Special Considerations

Evolution of Accounting Standards

Purchase acquisition accounting, introduced in 2007 and 2008 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), replaced previous methods. It strengthens fair market value concepts and includes accounting for contingencies and non-controlling interests.