What is Acquisition Accounting?
1025 reads · Last updated: December 5, 2024
Acquisition accounting is a set of formal guidelines describing 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 tangibleand intangible assets portion of the balance sheet of the buyer. Any resulting difference is regarded as goodwill. Acquisition accounting is also referred to as business combination accounting.
Definition
Acquisition accounting is a set of formal guidelines that describe how a purchasing company reports the assets, liabilities, non-controlling interests (NCI), and goodwill of the acquired company on its consolidated financial statements. The fair market value (FMV) of the acquired company is allocated between the net tangible and intangible assets on the buyer's balance sheet. Any resulting difference is considered goodwill. Acquisition accounting is also known as business combination accounting.
Origin
The concept of acquisition accounting originated in the early 20th century, evolving into a standardized set of accounting principles as mergers and acquisitions increased. In the 1990s, the International Accounting Standards Committee (IASC) and the Financial Accounting Standards Board (FASB) further refined and standardized these guidelines.
Categories and Features
Acquisition accounting primarily includes two types: the purchase method and the pooling of interests method. The purchase method emphasizes recording the acquired company's assets and liabilities at fair market value, while the pooling of interests method focuses more on the equity structure of the combined entity. The purchase method's advantages include transparency and consistency, though it may lead to goodwill overestimation. The pooling of interests method is less commonly used due to potential complexity in financial statements.
Case Studies
A typical case is Google's acquisition of YouTube in 2006. Google recorded YouTube's assets and liabilities at fair market value in its financial statements, with the difference recorded as goodwill. Another example is Microsoft's acquisition of LinkedIn in 2015, where Microsoft similarly used acquisition accounting to record LinkedIn's assets and liabilities at fair market value, with the difference as goodwill.
Common Issues
Common issues investors face when applying acquisition accounting include accurately assessing fair market value and the reasonableness of goodwill. A common misconception is that goodwill always represents positive value, overlooking potential impairment risks.
