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Purchase Method: Mergers, Acquistions and Restruturing
Purchase Method: Mergers, Acquistions and Restruturing
Purchase method
Under the purchase method, the acquirer writes up the target firm assets from
their book value to current market value and records them on its balance sheet.
The difference between the purchase price and the fair market value of the
target's net assets is recognized on the balance sheet as goodwill.
The asset and liabilities of the merged company are presented at their
market values as on the date of acquisition, in order to ensure that the
resulting values of the accounting process are able to reflect the market
values.
(AIMIT)
MERGERS, ACQUISTIONS AND RESTRUTURING
Under the pooling of interests method, the assets and liabilities of both
companies are simply added together at their historical cost book values
Compared with the pooling method, the purchase method results in higher book
values of assets. This, in turn, increases depreciation and goodwill amortization ,and
lowers reported income.
One of the drawbacks with purchase method is the chance that it may overrate
depreciation charges. because the book value of assets used in accounting is generally
lower than the fair value if there is inflation in the economy
(AIMIT)
MERGERS, ACQUISTIONS AND RESTRUTURING
Procedure
The assets and liabilities of the transferor company should be incorporated in the
transferee company financial statements in either ways.
Any excess of the purchase consideration over the value of assets should be recognized as
goodwill on the other had if purchase consideration is less than the net value of assets
acquired. Difference should treat as capital reserves.
Thank you………
(AIMIT)