What is Acquisition Accounting?

Acquisition accounting is a set of formal guidelines describing how assets, 澳洲幸运5官方开奖结果体彩网:liabilities, 澳洲幸运5官方开奖结果体彩网:non-controlling interest (NCI) and goodwill of a purchased company must be reported by the buyer on its 澳洲幸运5官方开奖结果体彩网:consolidated statement of financial position.

The 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) of the acquired company is allocated between the 澳洲幸运5官方开奖结果体彩网:net tangible and 澳洲幸运5官方开奖结果体彩网:intangible assets portion of the 澳洲幸运5官方开奖结果体彩网:balance sheet of the buyer. Any resulting difference is re🥀garded as goodwill. Acquisition accounting is also referred to as business combination accounting.

How Acquisition Accounting Works

澳洲幸运5官方开奖结果体彩网:International Financial Reporting Stand🤪ards (IFRS) and 澳洲幸运5官方开奖结果体彩网:International Accounting Standards (IAS) require all business combinations to be treated as 澳洲幸运5官方开奖结果体彩网:acquisitions for accounting purposes, meaning that one company must be identified as an acquirer and one company must be identified as an acquiree&nbℱsp;even if the transaction creates a new co✤mpany.

The acquisition accounting approach requires everything to be measured at FMV, the amount a third-party would pay on the open market, at the time of acquisition — the date that the acquirer took control of the target company. That inclu🏅des the following:

• Tangible assets and liabilities: Assets that have a physical form, including machinery, buildings, and land.
• Intangible assets and liabilities: Nonphysical assets, such as patents, trademarks, copyrights, goodwill, and brand recognition.
• Non-controlling interest: Also known as minority interest, this refers to a 澳洲幸运5官方开奖结果体彩网:shareholder owning less than 50% of 澳洲幸运5官方开奖结果体彩网:outstanding shares and having no control over decisions. If possible, the fair value of non-controlling interest can be derived from the share price of the acquiree.
• Consideration paid to the seller: The buyer can pay in many ways, including cash, stock or a contingent earnout. Calculations must be provided for any future payment obligations.
• Goodwill: Once all those steps have been taken, the purchaser must then calculate if there is any goodwill. Goodwill is recorded in a situation when the purchase price is higher than the sum of the fair value of all identifiable tangible and intangible assets bought in the acquisition.

History of Acquisition Accounting

Acquisition accounting was introduced in 2008 by the major accounting authorities, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), to replace the previous method, known as purchase accounting.

Acquisition accounting was preferred because it strengthened the concept of fair value. It focuses on prevailing market values in a transaction and includes 澳洲幸运5官方开奖结果体彩网:contingencies and non-controlling interests, which weꦺre not accounted for under the purchase method.

Another difference between the two techniques is how bargain acquisitions are treated. Under the purchase method, the difference between the acquired company's fair value and its purchase price was recorded as 澳洲幸运5官方开奖结果体彩网:negative goodwill (NGW) on the balance sheet that was to be 澳洲幸运5官方开奖结果体彩网:amortized over time. In contrast, with acquisition accounting, NGW is immediately treated as a gain on the 澳洲幸运5官方开奖结果体彩网:income statement.

Complexities of Acquisition Accounting

Acquisition accounting improved the transparency of 澳洲幸运5官方开奖结果体彩网:mergers and acquisitions (M&A) but did not make the process of combining financial records easier. Each component of 澳洲幸꧃运5官方开奖结果体彩网:assets and lia𒁏bilities of the acquired entity has to be adjusted for fair value in items ranging from 澳洲幸运5官方开奖结果体彩网:inventory and contracts to hedging instruments and&ꦐnbsp;contingencies, to name just a few♔.

The amount of work needed to adjust and integrate the books of the two companies is one main reason for the long period between agreement on a deal by the respective 澳洲幸运5官方开奖结果体彩网:boards of directors and the actual deal closing.