Acquisition Accounting
Acquisition accounting is a set of formal guidelines describing how assets, liabilities, non-controlling interest (NCI) and goodwill of a purchased company must be reported by the buyer on its consolidated statement of financial position.The fair market value(FMV) of the acquired company is allocated between the net tangibleand intangible assets portion of the balance sheet of the buyer. Any resulting difference is regarded as goodwill. Acquisition accounting is also referred to as business combination accounting.
Acquisition Accounting
Definition
Acquisition accounting is a set of formal guidelines that describe how the purchasing company reports the acquired company's assets, liabilities, non-controlling interests (NCI), and goodwill on its consolidated financial statements. The fair market value (FMV) of the acquired company is allocated between the net tangible and intangible assets on the buyer's balance sheet. Any resulting difference is considered goodwill. Acquisition accounting is also known as business combination accounting.
Origin
The concept of acquisition accounting originated in the early 20th century, evolving into a systematic set of accounting standards as corporate mergers and acquisitions increased. Key milestones include the Financial Accounting Standards Board (FASB) guidelines issued in the 1970s and the International Financial Reporting Standards (IFRS 3) issued by the International Accounting Standards Board (IASB) in 2001.
Categories and Characteristics
Acquisition accounting primarily includes two methods: the purchase method and the pooling of interests method. The purchase method emphasizes recording the acquired company's assets and liabilities at fair market value, while the pooling of interests method focuses on the book values of both merging entities. The purchase method is characterized by its ability to more accurately reflect the actual value of the acquired company but may result in the creation of goodwill. The pooling of interests method is less commonly used and is applicable in specific merger scenarios.
Specific Cases
Case 1: Company A acquires Company B for $100 million. Company B has net tangible assets of $60 million, intangible assets of $20 million, and a fair market value of $90 million. Under acquisition accounting, Company A records $60 million in net tangible assets and $20 million in intangible assets on its balance sheet, with the remaining $10 million recorded as goodwill.
Case 2: Company C acquires Company D for $50 million. Company D has net tangible assets of $30 million, intangible assets of $10 million, and a fair market value of $45 million. Company C records $30 million in net tangible assets and $10 million in intangible assets on its balance sheet, with the remaining $5 million recorded as goodwill.
Common Questions
1. Why does goodwill arise in acquisition accounting?
Goodwill represents the excess of the purchase price over the fair market value of the acquired company's net assets, typically reflecting intangible assets such as brand value and customer relationships.
2. How does acquisition accounting differ from consolidation accounting?
Acquisition accounting focuses on how the purchasing company records the acquired company's assets and liabilities in its financial statements, while consolidation accounting broadly addresses the financial reporting of the entire group post-merger.
