Acquisition method

Definition

The acquisition method is an accounting approach used to record business combinations, where one company acquires another. This method requires the acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values at the acquisition date. This approach ensures that the financial statements accurately reflect the economic realities of the transaction and provides a clearer picture of the combined entity's financial position.

5 Must Know Facts For Your Next Test

1. The acquisition method applies to all business combinations, except for those that are considered common control transactions.
2. Under the acquisition method, all identifiable assets and liabilities are recorded at their fair values on the acquisition date, regardless of their book values.
3. The acquisition method results in the recognition of goodwill if the purchase price exceeds the fair value of net identifiable assets acquired.
4. Non-controlling interests must be measured at fair value or at the proportionate share of the acquiree's identifiable net assets, depending on the accounting policy chosen.
5. This method requires extensive disclosures in financial statements, including details about the acquisition date, fair values assigned, and impacts on future earnings.

Review Questions

• How does the acquisition method differ from other accounting methods used in business combinations?
  • The acquisition method differs from other methods, like the pooling-of-interests method, by requiring that all identifiable assets and liabilities be recorded at their fair values at the acquisition date. This method focuses on providing a more accurate representation of what was actually paid for a business and ensures that financial statements reflect current economic conditions. Unlike older methods that did not require fair value measurements, the acquisition method enhances transparency and comparability in financial reporting.
• Evaluate how goodwill is calculated under the acquisition method and its significance in financial reporting.
  • Goodwill is calculated as the excess of the purchase price over the fair value of net identifiable assets acquired. This calculation is significant because goodwill reflects intangible factors like brand reputation or customer loyalty that contribute to a company's value. In financial reporting, goodwill is not amortized but must be tested for impairment annually, affecting both balance sheets and income statements. Properly assessing goodwill ensures that investors have an accurate view of a company's overall worth.
• Analyze the implications of fair value measurement for both identifiable assets and liabilities during a business combination under the acquisition method.
  • Fair value measurement during a business combination under the acquisition method has substantial implications for financial reporting. It impacts how assets and liabilities are presented on financial statements, influencing key ratios and overall assessments by stakeholders. By requiring fair value estimates, companies may face challenges in accurately valuing certain intangible assets or contingent liabilities, leading to potential volatility in reported earnings. Furthermore, this emphasis on fair value can affect future acquisitions and negotiations, as companies may need to justify their valuations against market perceptions.

Related terms

Goodwill: Goodwill is an intangible asset that represents the excess of the purchase price paid for an acquired entity over the fair value of its net identifiable assets.

Purchase Price Allocation: Purchase price allocation is the process of distributing the total cost of an acquisition among the identified assets and liabilities based on their fair values.

Consolidation: Consolidation is the accounting process of combining the financial statements of a parent company with its subsidiaries to present them as a single entity.