What is Acquisition Accounting?
Acquisition accounting is a set of formal rules portraying how assets, liabilities, non-controlling interest (NCI) and goodwill of a purchased company must be reported by the buyer on its consolidated statement of financial position.
The fair market value (FMV) of the acquired company is allocated between the net tangible and intangible assets portion of the balance sheet of the buyer. Any subsequent difference is viewed as goodwill. Acquisition accounting is likewise alluded to as business combination accounting.
How Acquisition Accounting Works
International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) require all business combinations to be treated as acquisitions for the purpose of accounting, implying that one company must be distinguished as a acquirer and one company must be recognized as a acquiree even on the off chance that the transaction makes another company.
The acquisition accounting approach expects all that to be estimated at FMV, the amount a third-party would pay on the open market, at the hour of acquisition — the date that the acquirer assumed command over the target company. That incorporates the accompanying:
- Substantial assets and liabilities: Assets that have a physical form, including machinery, structures, and land.
- Immaterial assets and liabilities: Nonphysical assets, like licenses, brand names, copyrights, goodwill, and brand recognition.
- Non-controlling interest: Also known as minority interest, this alludes to a shareholder possessing under half of outstanding shares and having no control over choices. On the off chance that conceivable, the fair value of non-controlling interest can be derived from the share price of the acquiree.
- Thought paid to the seller: The buyer can pay in numerous ways, including cash, stock or a contingent earnout. Computations must be accommodated any future payment obligations.
- Goodwill: Once that multitude of steps have been taken, the purchaser must then compute assuming there is any goodwill. Goodwill is kept in a situation when the purchase price is higher than the sum of the fair value of all identifiable substantial and immaterial assets bought in the acquisition.
Fair value analysis is in many cases directed by a third-party valuation specialist.
History of Acquisition Accounting
Acquisition accounting was presented in 2008 by the major accounting specialists, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), to supplant the previous method, known as purchase accounting.
Acquisition accounting was preferred on the grounds that it reinforced the concept of fair value. It centers around winning market values in a transaction and incorporates contingencies and non-controlling interests, which were not represented under the purchase method.
One more difference between the two strategies is the manner by which bargain acquisitions are dealt with. Under the purchase method, the difference between the acquired company's fair value and its purchase price was recorded as negative goodwill (NGW) on the balance sheet that should have been amortized over the long haul. Interestingly, with acquisition accounting, NGW is promptly treated as a gain on the income statement.
Intricacies of Acquisition Accounting
Acquisition accounting worked on the transparency of mergers and acquisitions (M&A) however didn't make the most common way of joining financial records simpler. Every part of assets and liabilities of the acquired substance must be adjusted for fair value in things going from inventory and agreements to hedging instruments and contingencies, to give some examples.
The amount of work expected to adjust and incorporate the books of the two companies is one primary justification behind the long period between agreement on a deal by the particular boards of directors and the real deal closing.
- Acquisition accounting is a set of formal rules depicting how assets, liabilities, non-controlling interest and goodwill of an acquired company must be reported by the purchaser.
- The fair market value of the acquired company is allocated between the net substantial and elusive assets portion of the balance sheet of the buyer. Any subsequent difference is viewed as goodwill.
- All business combinations must be treated as acquisitions for the purpose of accounting.