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Accounting For Acquisition 3 comments - Leave comment Topics:Financial Reporting, Merger and Acquisition Facebook Twitter Google

+ On any acquisition process, once due diligence and valuation of acquiree is completed, the process continued to recording (accounting the acquisition on the company!s book" #nd this task mostly be conducted by a general ledger specialist" Of course the $ontroller will want to review this area of accounting, since a mistake here can have a ma%or impact on overall corporate results" The only allowable method used is the purchase method" There are also many situations where a company merely makes a small investment in another company, rather than making an outright purchase" This requires three possible types of accounting, depending on the si&e of the investment and the degree of control attained over the sub%ect company'all three methods, which are the cost, equity, and consolidation methods. This post deals with the purchase method of accounting for an acquisition, as well as the cost, equity, and consolidation methods, which are used to describe purchases of varying proportions of another entity. I also address how to account for intercompany transactions between the acquirer and acquiree after the purchase is completed. Enjoy!

(ote: It is wort mentioning ere, t e terms merger and acquisition are not t e same t ing. An acquisition is w en !ot t e acquiring and acquired compan" are still le#t standing as separate entities at t e end o# t e transaction.

$urc ase Met od Acquisition Accounting
This approach to accounting for a business combination assumes that the acquiring company spreads the acquisition price over the assets being bought at their fair market value, with any remaining portion of the acquisition price being recorded in a goodwill account" The company being purchased can be bought with any form of consideration, such as stock, cash, or property .
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 I# treasur" stoc( is used as part o# t e consideration.T ere are t ree primar" steps involved in accounting #or a purc ase transaction: () determining the purchase price* (+ allocating this price among the various assets of the company being purchased* and (. T e met od o# valuation varies !" line item on t e acquired compan"&s !alance s eet.. unless t ere are receiva!les wit ver" long collection terms. t en t is must also !e valued at its #air mar(et value. . For e)ample:  I# t e purc ase is made wit stoc(. t e amount o# t e allowance #or !ad de!ts can !e ver" precisel" determined as o# t e acquisition date. t e stoc( must !e valued at its #air mar(et value. *ere are t e (e" rules on ow to allocate t e purc ase price among assets. For t is reason. t ere is generall" no need to discount t is valuation. Let&s go into more detail o# t e steps. T is is an opportunit" #or t e !u"er to mar( up a securit" to its #air mar(et value -i# suc is t e case. .tep-+" #llocate 0urchase 0rice #mong 1arious #ssets of The $ompany 2eing 0urchased T e second step in t e purc ase met od is to allocate t e purc ase price among t e acquired compan"&s assets and lia!ilities.AA$. lia!ilities and stoc( option o# compan" !eing purc ased: #ccounts 3eceivable + Record t is asset at its present value. since generall" accepted accounting principles -. w ic are t en recorded in t e !u"er&s accounting records. less t e allowance #or !ad de!ts. t is is an area in w ic t ere is some / .iven t e e)ceedingl" s ort time #rame over w ic t is asset is outstanding. 4arketable . Also.. Read on' . accounting for the first-year partial results of the purchased entity on the buyer!s financial statements . since t e acquisition transaction is generall" not completed until several mont s a#ter t e acquisition date -given t e e##ort required to ma(e t e accounting entr".tep-)" /etermining the 0urchase 0rice T e issue wit t e #irst step is t at t e purc ase price is !ased on t e #air mar(et value o# t e consideration given to t e seller.ecurities + T ese assets s ould !e recorded at t eir #air mar(et value. normall" onl" allows #or t e recognition o# reductions in mar(et value. w o can use various valuation models and industr" surve"s to derive a price per s are. t en it ma" !e necessar" to o!tain t e services o# an investment !an(er or appraiser.  I# t e !u"er&s stoc( is t inl" traded or closel" eld.

inventor" valuation s"stem. i# 234 o# all units sold are in purc ase quantities t at result in a per unit price o# 5%. t en t e newl" derived valuation #or t e #inis ed goods inventor" s all !e used as t e LIF7 !ase la"er #or all inventor" o!tained t roug t e purc ase transaction. T is can !e a di##icult tas( t at lengt ens t e interval !e#ore t e acquisition 8ournal entr" is completed. and 9quipment (00:9 + T ese assets s ould !e recorded at t eir replacement cost.63. T is can !e a di##icult calculation to ma(e i# t e #inis ed goods ave varia!le prices depending on w ere or in w at quantities t e" are sold1 in suc cases. less t eir average pro#it margin and disposition costs. #irst-out -LIF7. 0roperty. !ecause some assets ma" !e so old t at t ere is no equivalent product currentl" on t e mar(et. I# t e acquirer ad !een using a lastin. 3 . 0lant. 5nventory'work-in-process 67508 + T ese assets receive t e same valuation treatment as #inis ed goods.opportunit" to allocate an additional portion o# t e purc ase price !e"ond t e original cost o# t e asset. t e !u"er ma" #ind itsel# wit a signi#icantl" lower inventor" valuation as a result o# t e purc ase transaction t an originall" appeared on t e accounting records o# t e acquiree. or equipment ma" !e so speciali9ed t at it is di##icult to #ind a reasona!le alternative on t e mar(et.old + I# t e !u"er intends to sell o## assets as o# t e acquisition date. it is unli(el" t at t ere will !e a large amount o# potential appreciation in t e securities. e)cept t at t e cost o# conversion into #inis ed goods must also !e su!tracted #rom t eir eventual sale price. T is most accuratel" re#lects t eir disposal value as o# t e acquisition date. t en t is is t e most appropriate price to use. i# t e acquiree as #irm sales contracts as o# t e date o# t e acquisition wit speci#ic customers t at can !e used to clearl" determine t e prices at w ic t e #inis ed goods will actuall" !e sold. owever. T is rule can !e avoided. For e)ample. t en t ese assets s ould !e recorded at t eir #air mar(et value. ig l" liquid securities. *owever. suc as computer ardware. 5nventory'raw 4aterials + T ese assets s ould !e recorded at t eir replacement cost. and 9quipment To 2e . 0onsequentl". T is can !e a pro!lem i# t e acquiree is in an industr". since most companies onl" invest in s ort-term. 5nventory'finished Goods + T ese assets s ould !e recorded at t eir selling prices. 0lant. T is valuation step #requentl" calls #or t e services o# an appraiser. 0roperty. t e determination o# selling price s ould !e !ased on a istor" o# t e most common sales transactions. w ere inventor" costs drop at a rapid pace as new products come into t e mar(etplace.

or t e #uture use o# t e assets ma" not !e eas" to determine. t en t e 0F7 s ould value t e asset at its #air mar(et value. *owever. t en no cost s ould !e assigned. i# t e !u"er #orced t e acquiree to settle all claims under t e option plan prior to t e acquisition.$apital . and so must !e discounted to s ow t eir value on t e acquisition date. it must !e recogni9ed !" t e !u"er as part o# t e purc ase transaction. t en t e" s ould !e recorded at t eir discounted present values. #ccounts and (otes 0ayable + Accounts pa"a!le can t"picall" !e recorded at t eir current amounts as listed on t e !oo(s o# t e acquiree. one s ould care#ull" document t e reasons #or t e treatment o# R:. t e" s ould !e discounted and recorded as suc .eases + I# t e acquiree possesses assets t at were purc ased wit capital leases. w ile valuing t e associated lease at its net present value. T e precise allocation o# assets to e)pense or asset accounts can !e di##icult. 5ntangible #ssets + T ese assets are to !e recorded at t eir appraised values. 0onsequentl".tock Option 0lan + I# t e !u"er decides to ta(e over an e)isting stoc( option plan o# t e acquiree&s. 0ension . . pro8ect as !een completed. t en t is !ecomes a compensation e)pense t at is recorded on t e !oo(s o# t e acquiree. t e 0F7 s ould c arge t ese assets o## to e)pense i# t ere is no e)pectation t at t e" will ave an alternative #uture use once t e current R:. assets. Accordingl". even i# not recogni9ed on t e !oo(s o# t e acquiree. t e" are to !e valued at t eir present value1 discounting is rarel" necessar". *owever. I# t e !u"er cannot reasona!l" assign a cost to t em or identi#" t em. pro8ects are part o# t e acquiree. Example: < . i# t e accounts pa"a!le are not to !e paid #or some time. t en it must allocate part o# t e purc ase price to t e incremental di##erence !etween t e price at w ic s ares ma" !e purc ased under t e plan and t e mar(et price #or t e stoc( as o# t e date o# t e acquisition. #ccruals + T ese lia!ilities are t"picall" ver" s ort-term ones t at will !e reversed s ortl" a#ter t e current accounting period. T is treatment is used on t e assumption t at t e !u"er would ot erwise !e purc asing t ese lia!ilities on t e date o# t e acquisition.iability + I# t ere is an un#unded pension lia!ilit". not on a variet" o# dates stretc ing out into t e #uture. T e same logic applies to notes pa"a!le1 since all !ut t e s ortest-lived notes will ave a signi#icantl" di##erent present value. 3esearch and /evelopment (3:/ #ssets + I# an" assets associated wit speci#ic R:. since t e e)isting pro8ects ma" !e e)pected to last well into t e #uture.

Common stoc!5a((itional pai(6in capital . #ollowed !" a listing o# t e required valuation o# eac account under t e purc ase met od.#47$&%%% >e)t.estment in utra Corporation .lternati.333 #rom t e total o# all #air mar(et and ot er valuations s own 6 .4@ designates t e use o# sale price less t e gross margin.#$%%&%%% . a designation o# ?(01@ means t at t e net present value o# t e line item is s own. i# applica!le. de!its and credits are speci#ied #or eac ad8usting entr" listed in t e ?3equired #d%ustment@ column.#4%%&%%% Anot er approac would !e to e)c ange 6.. 3ote payable . T e new account valuation on t e rig t side o# t e ta!le can t en !e com!ined directl" into t e records o# t e acquiring compan".estment in utra Corporation . Cash .ely& i' Lie Dharma "ere to ma!e the purchase using a mix o' /%0 cash an( 1%0 'or a note& the entry "oul( be: )Debt*.333 s ares o# Lie . =nder t e ?0urchase 4ethod 1aluation@ column. In t e ta!le. +n. T e a!ove ta!le s ows t e initial !oo( cost o# eac account on t e acquiree&s !alance s eet. +n.#$%%&%%% )Cre(it*.#$%%&%%% )Cre(it*. and t e new account valuation. arma&s 5% par value stoc( #or t at o# $utra as a #orm o# pa"ment. +n. t e ad8ustment required. let&s sa" t e result o# all valuation process s own as t e #ollowing ta!le. and ?#1@ designates an asset&s appraised value. w ere it s ows t e calculation t at would !e required to ad8ust t e !oo(s o# an acquiree in order to t en consolidate it wit t e results o# t e acquiring compan". t e entr" would !e: )Debit*. ?3$@ designates t e use o# replacement cost.#2%%&%%% )Cre(it*.#$%%&%%% )Cre(it*.#$&%%% )Cre(it*. still on t e second step. =nder t is met od.alue .estment in utra Corporation .Let’s say the acquiring company (Lie Dharma Corporation) buys the acquiree’s ( utra Corporation’s) stoc! "ith #$%%&%%% o' cash& the entry on Lie Dharma’s boo!s "oul( be: )Debt*.. ?. Common stoc!5par . Cash . T e amount o# goodwill s own in t e ?3equired #d%ustment@ column is derived !" su!tracting t e purc ase price o# 5%6. a designation o# ?F41@ means t at t e #air mar(et value is s own -less an" costs required to sell t e item.

w ic is listed in t e goodwill account. . since an" internal costs c arged to t e acquisition would li(el" ave !een incurred an"wa". In addition. we ave a #air mar(et valuation o# 5%2. w ic "ields a net #air mar(et value #or t e acquiree o# 5%3. we end up wit a residual o# 5<. C en t is #air mar(et value is su!tracted #rom t e purc ase price o# 5%6.tatements T e t ird step in t e acquisition process is to account #or t e #irst "ear partial results o# t e acquired compan" on its !oo(s. !ut a#ter t e date o# t e acquisition.tep-. An additional item is t at a lia!ilit" s ould !e recogni9ed at t e time o# t e acquisition #or an" plant closings or losses on t e dispositions o# assets t at are planned as o# t at date1 t is is not an e)pense t at is recogni9ed at a later date. 7nl" t e income o# t e acquiree t at #alls wit in its current #iscal "ear. T ese acquisition costs s ould !e almost entirel" #or outside services. T e onl" variation #rom t is rule is t e costs associated wit issuing equit" to pa" #or t e acquisition1 t ese costs can !e recorded as an o##set to t e additional paid-in capital account. s ould !e added to t e !u"er&s accounting records. it does not report t e com!ined results o# t e two entities #or "ears prior to t e acquisition." #ccount for the First-<ear 0artial 3esults of the 0urchased 9ntity on The 2uyer!s Financial .3A2 #or all assets. I# t e acquirer c ooses to report its #inancial results #or multiple "ears prior to t e acquisition.DBB. A reverse acquisition is one w ere t e compan" issuing its s ares or ot er pa"ment is actuall" t e acquiree. D . less a #air mar(et valuation o# 52. !ecause t e acquiring compan"&s s are olders do not own a ma8orit" o# t e stoc( a#ter t e acquisition is completed.333. t e !u"er must c arge all costs associated wit t e acquisition to current e)penseEt e" cannot !e capitali9ed. >ote t at t e ?#d%usted #cquiree 3ecords@ column on t e rig t side o# t e e) i!it still must !e added to t e acquirer&s records to arrive at a consolidated #inancial statement #or t e com!ined entities.3/3.3B6 #or all lia!ilities. even in t e a!sence o# t e acquisition. since we assume t at t e !u"er was aware at t e purc ase date t at some asset dispositions would !e required. In t is case.in t e ?0urchase 4ethod 1aluation@ column.

(+ample +' the initial in. or the e?change of management personnel between companies" The method is only used when the investee is a corporation. It t en recogni9es as income an" dividends distri!uted !" t e investee a#ter t e investment date.estment in Company .:C "ere #2&%%%&%%% in exchange 'or o"nership o' 4%0 o' its common stoc!& then the entry on the boo!s o' the in. involvement in its management activities. there are cases that buyers only obtain another company’s stock that less than 5 ! where buyer’s does not have control right over it with various conditions. or i# it #ails to o!tain representation on t e Foard o# . t e investing compan" records t e initial investment at cost on its !oo(s. partnership. or less than +=> but with evidence of some degree of management control over the investee. =nder t is met od. I am going to discuss these methods on the ne+t paragraphs. @nder the equity method. I have mentioned at the preface of this post.As. such as control over some portion of the investee!s 2oard of /irectors.estor "oul( be: B . In those cases. or t e concentration o# voting power is clearl" in evidence among a di##erent group o# s are olders. T e !u"er does not ave control i# it cannot o!tain #inancial results #rom t e ot er compan" t at it needs to create entries under t e equit" met od. the acquirer records its initial investment in the investee at cost. and when both organi&ations remain separate legal entities. 8ea( on9 0ost Met od Acquisition Accounting The cost method is used to account for the purchase of another company!s stock when the buyer obtains less than +=> of the other company!s shares and does not have management control over it .irectors. is #orced to relinquis signi#icant s are older rig ts. or %oint venture. Gquit" Met od Acquisition Accounting The equity method of accounting for an investment in another company is used when the investor owns more than +=> of the investee!s stock. there are" #$% cost method& #'% (quity )ethod& and #*% consolidation method.

t en a loss can !e recogni9ed and c arged against current earnings. +n.e( 'rom Company . since t e #unds #rom t e investee&s income ave not actuall" !een distri!uted to t e investor. (+ample <o continue "ith the prece(ing example& i' the incremental tax rate 'or the in.:C’s income: )Debit*.#/$&%%% )Cre(it*. +n. (+ample +' (i.#/$&%%% I# t e mar(et price o# t e investor&s s ares in t e investee drops !elow its investment cost.)Debit*.i(en(s o' #/$&%%% are recei.estment in Company .#2&%%%&%%% )Cre(it*.#2&%%%&%%% A#ter t e initial entr". +n.#21&/4% )Cre(it*. even t oug it ma" not ave !een received.:C . Gvidence o# a permanent loss in mar(et value would !e a long2 . since income was alread" accounted #or as a portion o# t e investee&s income. <he entry "oul( be: )Debit*.#41&%%% T e credit in t e last 8ournal entr" can more precisel" !e made to an =ndistri!uted Investment Income account. t e investor records its proportional s are o# t e investee&s income against current income. *owever.#21&/4% I# t e investee issues dividends.ividends are not recorded as income. Cash . (+ample +' the in.e its 4%0 share o' this income& "hich is #41&%%%. De'erre( taxes .estment in Company . i# t e loss in mar(et value appears to !e permanent. t en t ese are recorded as an o##set to t e investment account and a de!it to cas .:C . Cash .:C .estee has a gain o' #2/%&%%%& the in. T e investor s ould also record a de#erred income ta) e)pense !ased on an" income attri!uted to t e investee.estment in Company . +n.#41&%%% )Cre(it*.:C& the entry "oul( be: )Debit*.estor can recogni. .estment income .estor is =10& then it "oul( recor( the 'ollo"ing entry that is base( on its #41&%%% o' Company . t ese are not normall" an" grounds #or reducing t e amount o# t e investment. +ncome tax expense .

C en it does t is. A .:C "ere to experience an extraor(inary loss o' #2$&%%%& the entry "oul( be: )Debit*. t e investor s ould stop recording an" transactions related to t e investment in order to avoid recording a negative investment. or repeated and su!stantial reported losses !" t e investee.#2$&%%% I# t e investee e)periences suc large losses t at t e investor&s investment is reduced to 9ero. T is will increase t e si9e o# an" gain t at is eventuall" recogni9ed on t e sale o# t e investment. a#ter ma(ing a downward ad8ustment in its investment.estor’s . +n.:C necessitate( a (o"n"ar( a(justment in the in.estment in Company .:C .:C . >n(istribute( extraor(inary loss .aluation& the entry "oul( be: )Debit*.term drop in mar(et value t at is su!stantiall" !elow t e investment cost. it cannot return t e carr"ing amount o# t e investment to its original level. t en t e investor can resume use o# t e equit" met od in reporting its investment. Loss on in. *owever. (+ample +' the mar!et price o' the stoc! in Company . I# t e investee eventuall" records a su##icient amount o# income to o##set t e intervening losses. (+ample +' Company . t e same rule does not appl" i# t e investor switc es #rom t e cost met od to t e equit" met odEin t is case. it is recorded separatel" #rom t e usual investment accounts. its cost !asis s ould !e t e amount in t e investment account as o# t e date o# c ange. t en it s ould switc to t e cost met od o# reporting its investment. wit no prospects #or an improvement in reported earnings. +n.#$%&%%% I#. I# t e investee e)periences an e)traordinar" gain or loss.#2$&%%% )Cre(it*. t e investor s ould record its proportional s are o# t is amount as well. T e new !asis #or t e investment is t e amount to w ic it as !een written down. t e investor must restate its investment account to re#lect t e equit" met od o# accounting #rom t e date on w ic it made its initial investment in t e investee. t e investor #inds t at t e mar(et price as su!sequentl" increased.estment in Company .#$%&%%% )Cre(it*.estments . I# t e investor loses control over t e investee. *owever.

C en reporting t e results o# its investment in anot er compan" under t e equit" met od. In eit er case. it must first eliminate all intercompany transactions" 2y doing so.. then the financial results of both companies should be combined in a consolidated set of financial statements. t e !lended gross margin presents a misleading view o# t e gross margins o# !ot entities. C en constructing consolidated #inancial statements. t e com!ined results o# t e two enterprises could lead to misleading #inancial results. *owever. I# t ere is a "ear o# divestiture. #ccounts 3eceivable and 0ayable + T e most common intercompan" transaction is t e account receiva!le or pa"a!le associated wit t e trans#er o# goods !etween divisions o# t e %3 . it ma" still !e appropriate to use t e equit" met od1 ot erwise. t e investor s ould list t e investment in a single Investment in Hu!sidiar" line item on its !alance s eet and in an Investment Income line item on its income statement. t e equit" met od s ould !e used. it eliminates any transactions that represent the transfer of assets and liabilities between what are now essentially different parts of the same company. t e #inancial results o# t e acquiree in t at "ear s ould onl" !e consolidated up until t e date o# divestiture.ales.T e transactions t at s ould !e eliminated are:  5ntercompany . but allows it to remain as a separate legal entity. i# t e companies are involved in entirel" di##erent lines o# !usiness. $ost-Acquisition Intercompan" Transactions 7hen the acquirer elects to report consolidated financial information.For e?ample: i# a so#tware compan" wit A34 gross margins com!ines wit a steel rolling #acilit" w ose gross margins are in t e /64 range -!ot !eing t"pical margins #or t eir industries. Anot er case in w ic a 634I level o# owners ip mig t not result in t e use o# a consolidation is w en t e investing compan" onl" e)pects to ave temporar" control over t e acquiree or i# t e !u"er does not ave control over t e acquiree -per aps !ecause control is e)ercised t roug a small amount o# restricted voting stoc(. t e preacquisition results o# t e acquiree s ould !e e)cluded #rom t e #inancial statements. 0onsolidation Met od 7hen a company buys more than A=> of the voting stock of another company.

since t e associated goods or services are merel" !eing moved around wit in t e compan" and are not caused !" a !usiness transaction wit an outside entit". t is is still 8ust a trans#er o# mone" wit in t e compan". accounts pa"a!le. 5ntercompany /ividend 0ayments + T is is merel" a trans#er o# cas !etween di##erent divisions o# t e corporate parent. t ese accounting transactions ave not reall" occurred. 5ntercompany 0rofits + A common issue #or verticall" integrated companies is t at multiple su!sidiaries recogni9e pro#its on component parts t at are s ipped to ot er su!sidiaries #or #urt er wor(. 5ntercompany . i# t e sale never occurred. 5ntercompany 5nvestments + T e corporate parent&s investment in an" su!sidiaries is removed #rom t e consolidation. all o# t ese intercompan" pro#its must !e eliminated. i# a corporate parent created a su!sidiar" and invested a certain amount o# equit" in it. Fi?ed #sset .oans and any #ssociated /iscounts. it must !e removed #rom t e consolidated #inancial statements. From t e perspective o# someone outside t e consolidated compan". as was t e case #or intercompan" dividend pa"ments. T ese entries must !e reversed. #or consolidation purposes.       parent compan". and sales are eliminated. 0remiums. and so is not allowed. and so s ould !e invisi!le on t e consolidated statement.ale Transactions + C en #i)ed assets are sold #rom one su!sidiar" to anot er. all intercompan" accounts receiva!le. and 5nterest 0ayments + T oug t ere are good reasons #or using intercompan" loans. Accordingl". 5ntercompany 2ad /ebts + A !ad de!t #rom anot er division o# t e same compan" cannot !e recogni9ed. since t e associated sale and account receiva!le transaction must also !e eliminated as part o# t e consolidation process. T us. since t e onl" pro#it gained #rom t e consolidated perspective is w en t e completed product is #inall" sold !" t e last su!sidiar" in t e production process to an outside entit". 5ntercompany 3ent 0ayments + T is is a #orm o# intercompan" pa"a!le. t en t ere cannot !e a !ad de!t associated wit it. t e selling compan" will eliminate t e associated accumulated depreciation #rom its !oo(s as well as recogni9e a gain or loss on t e transaction. suc as t e provision o# #unds to ris(" su!sidiaries t at mig t not !e a!le to o!tain #unds !" ot er means. t is investment would appear on t e !oo(s o# !ot t e %% . For e)ample. 7n a consolidated !asis. since t e #i)ed asset as not le#t t e consolidated organi9ation. In s ort.

AA$. Measure t e amount o# an" noncontrolling interest in t e acquired !usiness <.iabilities Measure tangi!le assets and lia!ilities at t eir #air mar(et values as o# t e acquisition date. who is responsible for the consolidation reporting. T is approac mandates a series o# steps to record t e acquisitions. w ic are: %. most assets and lia!ilities s ould !e measured as o# t e acquisition date.parent -as an investment. these transactions are invisible to all but the $ontroller. T ere are a #ew e)ceptions.iabilities Measure intangi!le assets and lia!ilities at t eir #air mar(et values as o# t e acquisition date. w ic are measured as o# t eir inception dates. T is #air value anal"sis is #requentl" done !" a t ird-part" valuation #irm. #ll intercompany eliminations are recorded on a separate consolidation worksheet" They are not recorded on the books of any of the subsidiaries or the parent company" 5n essence. +" 4easure 5ntangible #ssets and . and t e su!sidiar" -as equit". Measure t e amount o# consideration paid to t e seller 6. In a consolidation. !ot entries are removed. suc as lease and insurance contracts. *owever. w ic is t e date w en t e acquirer gains control over t e acquiree. )" 4easure Tangible #ssets and . Measure an" intangi!le assets and lia!ilities t at were acquired 3. Measure an" tangi!le assets and lia!ilities t at were acquired /. Measure an" goodwill or gain on t e transaction Ce will deal wit eac o# t ese steps !elow. T e Acquisition Met od o# Accounting C en an acquiree !u"s anot er compan" and t e acquirer uses . T is tends to !e a more di##icult tas( #or t e acquirer t an t e %/ . w ic is t e date w en t e acquirer gains control over t e acquiree.. it must record t e event under t e acquisition met od.

and ot er t"pes o# assets. t e acquirer must !ac( into t e amount o# an" goodwill or gain on a !argain purc ase !" using t e #ollowing calculation: 0onsideration paid I >oncontrolling interest + Identi#ia!le assets acquired I Identi#ia!le lia!ilities acquired I# t is calculation results in a !argain purc ase -#ormerl" (nown as negative goodwill. T e #air value can !e derived #rom t e mar(et price o# t e stoc( o# t e acquiree. since t e acquiree ma" not ave recorded man" o# t ese items on its !alance s eet. B" 4easure $onsideration 0aid T ere are man" t"pes o# consideration t at ma" !e paid to t e seller.ummary T e man" steps noted ere to record an acquisition cannot alwa"s !e completed in time to !e accuratel" recorded in t e accounting period w en an acquisition is completed. !ased on #acts and circumstances t at e)isted as o# t e acquisition date. including cas . t en t e acquirer as paid less #or t e acquiree t an t e #air values o# its assets and lia!ilities indicate t at it is wort . t e acquirer s ould report its !est estimates in t e relevant accounting period. a contingent earnout. In#ormation arising at a later date %3 .measurement o# tangi!le assets and lia!ilities. . and t en ad8ust t ose #igures later. stoc(. i# an active mar(et #or it e)ists. >o matter w at t"pe o# consideration is paid. it is measured at its #air value as o# t e acquisition date. A" 4easure Goodwill or 2argain 0urchase Gain A#ter all o# t e preceding steps ave !een completed. de!t." 4easure (oncontrolling 5nterest Measure and record t e noncontrolling interest in t e acquiree at its #air value on t e acquisition date. I# it appears t at t e accounting will !e dela"ed. since t ere is no control premiumassociated wit t e noncontrolling interest. A !argain purc ase is recogni9ed as a gain as o# t e acquisition date.. T is amount is li(el" to !e less per s are t an t e price t e acquirer paid to !u" t e !usiness. suc as earnouts. T e acquirer s ould include in t is consideration calculation t e amount o# an" #uture pa"ment o!ligations. .

ma" result in su!sequent c anges to asset and lia!ilit" values. !ut t e" s ould not !e used to retroactivel" ad8ust t e recordation o# t e original acquisition entr". 3elated Topics Acquisition anal"sis Acquisition target identi#ication T e ostile ta(eover Ta)-#ree acquisitions T e triangular merger %< .