What is Acquisition Accounting?
Acquisition Accounting, also called the Purchase Method, is the required accounting treatment under IFRS and GAAP for recording business combinations, where the acquiring company recognizes the acquired assets and liabilities at fair value on the acquisition date.
Definition
Acquisition Accounting is the process of allocating the purchase price of an acquired company to its identifiable assets, liabilities, and contingent liabilities at fair value, while recording any excess as goodwill.
Key Takeaways
- Required under IFRS 3 and ASC 805.
- All identifiable assets and liabilities recorded at fair value.
- Generates goodwill when purchase price exceeds net identifiable assets.
- Ensures transparency and comparability in M&A activity.
- Used for full, partial, or step acquisitions.
Understanding Acquisition Accounting
Under Acquisition Accounting, the acquirer must:
- Identify the acquirer.
- Determine the acquisition date.
- Measure the identifiable assets and liabilities at fair value.
- Recognize intangible assets such as trademarks, patents, and customer relationships.
- Record goodwill or bargain purchase gain.
This method ensures that financial statements reflect the true economic value of the acquired business, rather than historical cost.
Key Components
- Fair value measurement of assets and liabilities.
- Goodwill recognition.
- Non-controlling interest (NCI) measurement.
- Transaction cost treatment (expensed immediately).
Formula (If Applicable)
Goodwill Calculation
Goodwill = Purchase Price − Fair Value of Net Identifiable Assets
Example: If a company pays $500M for a target with $400M fair value in identifiable assets, goodwill = $100M.
Real-World Example
When Amazon acquired Whole Foods, the acquisition created goodwill related to brand value, customer loyalty, and expected synergies.
Large acquisitions like Salesforce buying Slack or Microsoft buying Activision Blizzard follow strict acquisition accounting rules.
Importance in Business or Economics
- Enhances financial transparency in M&A.
- Helps investors assess whether an acquisition was overpriced.
- Critical for impairment testing of goodwill.
- Supports the valuation of intangible assets.
Types or Variations
- Full Goodwill Method
- Partial Goodwill Method
- Step Acquisition Accounting
- Asset Acquisition vs Business Combination distinction
Related Terms
- Goodwill
- Purchase Price Allocation (PPA)
- Business Combination
- Fair Value Accounting
- Non-Controlling Interest (NCI)
Sources and Further Reading
- IFRS 3 – Business Combinations
- FASB ASC 805 – Business Combinations
- EY, Deloitte — M&A Accounting Guides
- Corporate Finance Institute – Purchase Price Allocation
Quick Reference
- Purpose: Record business combinations at fair value.
- Standards: IFRS 3, ASC 805.
- Output: Goodwill, PPA schedule.
- Impact: Affects earnings through amortization and impairment.
Frequently Asked Questions (FAQs)
Is goodwill amortized?
Under IFRS, goodwill is not amortized but tested for impairment annually.
Are transaction costs capitalized?
No—acquisition-related costs are expensed as incurred.
Does acquisition accounting affect cash flow?
Only through the initial purchase; fair value adjustments are non-cash.
What is a bargain purchase?
When the purchase price is lower than the fair value of net assets, creating a gain.
