What is Acquisition Accounting?

A set of formal rules known as acquisition accounting specifies how the buyer must disclose the assets, liabilities, non-controlling interest (NCI), and goodwill of a bought firm on its consolidated statement of financial condition.

The buyer’s balance sheet’s net tangible and intangible assets section is where the purchased firm’s fair market value (FMV) is distributed. Any change that results from this is seen as goodwill. Business combination accounting is another name for acquisition accounting.

The Operation of Acquisition Accounting

All business combinations must be considered acquisitions for accounting purposes under International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).

This means that even if the transaction creates a new company, one company must be identified as the acquirer and one as the acquiree.

Everything must be valued at fair market value (FMV), or the price a buyer would pay on the open market, at the time of the acquisition or the day the acquirer assumed control of the target firm.

What follows is included in that:

• Liabilities and assets have a physical presence, such as equipment, structures, and land.
• Liabilities and intangible assets Patents, trademarks, copyrights, goodwill, and brand awareness are examples of non-physical assets.
• Non-controlling interest, often known as a minority interest, is the ownership of less than 50% of the outstanding shares by a shareholder without voting rights. If practicable, the acquiree’s stock price may be used to determine the fair value of the non-controlling stake.
• Purchase price given to the seller: The purchaser has various payment options, including cash, stock, and contingent earnouts. For any potential payment responsibilities in the future, calculations must be given.
• After doing all of these actions, the buyer must determine if there is any goodwill. When the purchase price exceeds the total fair value of all identified physical and intangible assets acquired in the transaction, goodwill is recognized.

Acquisition Accounting’s Past

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) established acquisition accounting in 2008 to replace the old approach known as purchase accounting.

Due to the way acquisition accounting supported the idea of fair value, it was favored. It emphasizes current market values in a transaction and considers non-controlling interests and eventualities that weren’t considered under the buy technique.

How bargain purchases are handled in the two methods is another distinction. According to the acquisition method, the difference between the purchased company’s fair value and the purchase price was recorded on the balance sheet as negative goodwill (NGW), which was meant to be amortized over time. In contrast, when using purchase accounting, NGW is instantly reported as a gain on the income statement.

Acquisition Accounting’s Difficulties

The process of integrating financial records was not made any simpler by acquisition accounting, but it did increase the transparency of mergers and acquisitions (M&A).

Everything from contracts and inventories to hedging instruments and contingencies, to mention a few, must be valued fairly for each component of the acquired entity’s assets and liabilities.

One major factor contributing to the lengthy time between a merger being approved by the respective boards of directors and the deal closing is the amount of work required to update and integrate the accounts of the two firms.

Conclusion

• Acquisition accounting is a collection of formal rules outlining how the buyer must record an acquired firm’s assets, liabilities, non-controlling interest, and goodwill.
• The buyer’s balance sheet’s net tangible and intangible assets section is comprised of the fair market value of the acquired firm. Any change that results from this is seen as goodwill.
• For accounting reasons, any corporate combination must be regarded as an acquisition.