Acquisition Accounting

MoneyBestPal Team
A method of reporting the purchase of a company by another company.

Acquisition accounting is a method of reporting the purchase of a company by another company. It is used in both IFRS and US GAAP, albeit US GAAP makes a distinction between various takeover kinds. 

The acquirer is required by acquisition accounting to identify and value the acquiree's assets and liabilities at their fair market value on the acquisition date. Goodwill is defined as the discrepancy between the acquiree's fair market value and the compensation given to the seller.

There are several steps involved in acquisition accounting:
  1. The acquiree and the acquirer should be named. The entity that takes control of the acquiree, or the acquired company, is known as the acquirer. Control is the capacity to direct the acquiree's pertinent operations that influence its returns.
  2. Identify the purchase date. The date the acquirer takes possession of the acquiree is known as the acquisition date. This might not coincide with the transaction's closing date or agreement date.
  3. Calculate the value that was transferred. The sum that the acquirer pays the seller to gain ownership of the acquiree is known as the consideration transferred. Cash, stock, future payments, and other assets or obligations may be included.
  4. Determine and quantify the measurable assets acquired and liabilities taken on. Following IFRS 3 or FASB ASC 805, the acquirer must identify and value all of the acquiree's assets and liabilities that fit the definition of an asset or a liability. The fair market value of the assets and liabilities as of the acquisition date, which is the price a third party would pay on the open market, shall be used to measure such assets and liabilities. Deferred tax assets and liabilities, contingent assets and liabilities, intangible assets, physical assets, and deferred tax assets are a few examples of identifiable assets and liabilities.
  5. Identify and quantify any non-controlling interests. The share of stock in a subsidiary that cannot be attributed to the parent firm is known as the non-controlling interest (NCI). The acquirer must recognize and assess the NCI at its fair market value on the acquisition date if it does not acquire 100% of the acquiree's stock. The share price of the acquiree, if known, or other valuation methods can be used to determine NCI's fair market value.
  6. Determine the gain or goodwill from a discount purchase. The surplus of the transferred consideration over the net fair market value of the acquired identified assets and liabilities is represented by the intangible asset known as goodwill. The predicted future benefits of synergy, customer loyalty, human capital, etc. are not individually identifiable or measurably represented by goodwill. When the identified assets bought and liabilities taken on exceed the consideration exchanged, a gain from a bargain purchase is realized. This could mean that the acquirer made a good deal or that there were measurement problems in the transaction.

Business combination reporting can be done consistently and transparently using acquisition accounting. It aids in the understanding of the financial status and performance of an entity by investors and other consumers of financial statements.