What is 'Acquisition Accounting'

Acquisition accounting is a set of formal guidelines describing how assets, liabilities, non-controlling interest and goodwill of a target company must be reported by a purchasing company on its consolidated statement of financial position. With acquisition accounting the fair market value of the acquired firm is allocated between the net tangible and intangible assets portion of the balance sheet of the acquiring firm; the difference is regarded as goodwill. Also called "business combination accounting."

BREAKING DOWN 'Acquisition Accounting'

International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) require all business combinations to be treated as acquisitions for accounting purposes, meaning that one company must be identified as an acquirer and one company must be identified as an acquiree even if the transaction creates a new company. In the past, a method called "purchase accounting" was used in business combination accounting, but standard changes made acquisition accounting the only acceptable method because it strengthened the concept of fair value. Acquisition accounting focuses on prevailing market values in a transaction and includes contingencies and non-controlling interests, which were not accounted for under the purchase method.

Complexities of Acquisition Accounting

The method of acquisition accounting improved transparency of M&A but did not make the process of combining financial records easier. Each component of assets and liabilities of the acquired entity has to be adjusted for fair value in items ranging from inventory and contracts to hedging instruments and contingencies, to name just a few. The amount of work needed to adjust and integrate the books of the two companies is one main reason for the long period between agreement on a deal by the respective boards of directors and the actual deal closing.

RELATED TERMS
  1. Push Down Accounting

    Push down accounting is a convention of accounting for the purchase ...
  2. Goodwill Impairment

    Goodwill that has become or is considered to be of lower value ...
  3. Acquisition

    A corporate action in which a company buys most, if not all, ...
  4. Acquisition Adjustment

    An acquisition adjustment pertains to the premium a business ...
  5. Accounting Standard

    An accounting standard is a principle that guides and standardizes ...
  6. Goodwill To Assets Ratio

    The goodwill to assets ratio is a ratio that measures how much ...
Related Articles
  1. Investing

    GAAP And The IFRS Standards Convergence Efforts In 3 Substantial Areas

    Understand the specific steps that have been taken in hopes of converging the GAAP and the IFRS accounting standards, despite the philosophically and culturally based methodological differences ...
  2. Investing

    Goodwill versus other intangible assets: What's the difference?

    "Intangible" assets don't possess physical substance. Yet they are quantifiable, and of great importance to any business.
  3. Investing

    Can You Count on Goodwill?

    Carefully examine goodwill and its sources before considering the value of your investment.
  4. Investing

    Goodwill Impairment Test: When You Overpay in M&A

    Overpaying for acquisitions can result in goodwill impairment charges and loss in stock value. How do companies test whether they have paid too much?
  5. Investing

    Writing Down Goodwill

    An ill-fated acquisition of Hewlett-Packard's demonstrates what can happen when goodwill goes bad.
  6. Investing

    How Does Goodwill Affect Stock Prices?

    Intangibles like goodwill have a role in stock prices, but just how much really?
  7. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  8. Investing

    The Ins and Outs of In-Process R&D Expenses

    Are these charge-offs fair accounting or earnings manipulation? Learn more here.
  9. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
  10. Investing

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
RELATED FAQS
  1. How is market to market accounting different than historical cost accounting?

    Learn about historical cost accounting and mark to market accounting, the difference between and the limitations of the two ... Read Answer >>
  2. How does goodwill increase a company's value?

    Learn about the basics of goodwill in the business world, what positive effects it can have on a company's overall value ... Read Answer >>
  3. How does goodwill amortize?

    Learn about the Financial Accounting Standards Board 's (FASB) rules for goodwill amortization, how the rules have changed ... Read Answer >>
  4. How companies' stocks move during an acquisition?

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  5. What does financial accounting focus on?

    Learn the main tenets of financial accounting, the guidelines by which it is governed and how outsiders use it to gauge a ... Read Answer >>
  6. Why is it important for an investor to understand business accounting?

    Learn to understand why it is important for an investor to understand business accounting to perform investment and credit ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center