What is Acquisition Cost?
951 reads · Last updated: December 5, 2024
An acquisition cost, also referred to as the cost of acquisition, is the total cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures, but before sales taxes. An acquisition cost may also entail the amount needed to take over another firm or purchase an existing business unit from another company. Additionally, an acquisition cost can describe the costs incurred by a business in relation to the efforts involved in acquiring a new customer.
Definition
Acquisition cost, also known as acquisition cost, refers to the total cost recognized by a company on its books for real estate or equipment before adjustments for discounts, incentives, settlement costs, and other necessary expenditures, excluding sales tax. Acquisition cost may also include the amount required to take over another company or purchase an existing business unit from another company. Additionally, acquisition cost can describe the costs incurred by a business in efforts to acquire new customers.
Origin
The concept of acquisition cost originates from the fundamental principles of corporate accounting and financial management, evolving with the increase in corporate mergers and acquisitions. In the late 20th century, with globalization and intensified market competition, the focus on acquisition costs by companies significantly increased.
Categories and Features
Acquisition costs can be categorized into asset acquisition costs, business acquisition costs, and customer acquisition costs. Asset acquisition costs primarily involve expenses for purchasing fixed assets; business acquisition costs include expenses for acquiring other companies or their business units; customer acquisition costs are the expenses incurred by a company in marketing and sales activities to acquire new customers. Each type of acquisition cost has its specific application scenarios and pros and cons. For example, asset acquisition costs are usually more straightforward and easier to quantify, while customer acquisition costs may involve more complex market analysis and strategies.
Case Studies
A typical case is Microsoft's acquisition of LinkedIn for $26.2 billion in 2016. The acquisition cost included not only the purchase price but also the costs of integrating LinkedIn's employees and technology. Another example is Amazon's acquisition of Whole Foods Market for $13.7 billion in 2017, where the acquisition cost covered the asset value of retail stores and the costs of brand integration.
Common Issues
Common issues investors face when applying the concept of acquisition cost include accurately assessing the various components of acquisition costs and correctly reflecting these costs in financial statements. A common misconception is equating acquisition cost with the purchase price, overlooking integration and other related expenses.
