Acquisition Accounting

What is Acquisition Accounting?

Acquisition Accounting is a collection of formal guidelines of how details of assets, liabilities, non-controlling interest and goodwill of a purchased company must be reported by the buyer on its whole statement of financial position.

The Fair Market Value of the acquired company is earmarked between the net tangible and intangible assets portion of the Balance Sheet. Acquisition accounting is also referred to as a business combination accounting.

How does Acquisition Accounting Work?

International Financial Reporting Standards and International accounting standards require all business combinations to be treated as acquisitions for accounting purposes.

The acquisition accounting method requires to be measured at fair Market value, the amount of third-party would pay on the Open Market or at the time of acquisition or even the date that the acquirer took control of the target company. It includes the following aspects of it:

Tangible assets and liabilities

Assets which are having a physical form such as machinery, buildings and Land.

Intangible assets and liabilities

Some non-physical assets such as patents, trademarks, copyrights, goodwill and brand recognition.

On-controlling interest

It is also known as minority interest this usually refers to a shareholder owning less than 50% of outstanding shares and having no control over decisions. The Fair Value of non-controlling interest can be obtained from the share price of the acquired.

Consideration paid to the seller

The buyer pays in various ways that include cash, stock or contingent earnout. The computation should be provided for any future payment commitments.

Goodwill

Once all of these steps have taken place, then the purchaser must calculate if there is any goodwill. Usually, goodwill is recorded when the purchase price is higher than the sum of the fair value of recognizable tangible and intangible assets bought with the acquisition.