The accounting procedures followed when one company is taken over by another, including the allocation of the fair value of purchase consideration, and the treatment of goodwill.
Acquisition accounting (also known as purchase accounting) refers to the accounting methods applied when one company acquires another. This process involves assigning the fair value of the purchase consideration to the acquired company’s underlying net tangible and intangible assets, excluding goodwill. The excess of the purchase price over the fair values of the identifiable assets and liabilities acquired represents goodwill.
Upon acquisition, the purchase consideration is distributed among the acquired assets and liabilities based on their fair values. This includes both tangible assets, like equipment and inventory, and identifiable intangible assets, such as patents and trademarks.
Goodwill is calculated as:
The acquired company’s results are included in the consolidated financial statements from the acquisition date. Pre-acquisition results are excluded from the consolidated financial performance.
The basic formula to calculate goodwill is:
Acquisition accounting is crucial for providing accurate financial information post-acquisition, affecting financial ratios, performance analysis, and investment decisions.