What is Acquisition Accounting?

Also known as Business Combination Accounting, there are specific guidelines and bits of information that must be documented on the books during an acquisition.

Acquisition Accounting is a standardized way to account for the assets and liabilities of companies who are part of a merger or acquisition. International Financial Reporting Standards (IFRS) stipulate that even in a merger where a new company is formed, one company must play the role of acquirer and the other of acquiree, but that rule really only applies outside of the US.

The Acquiring company in an acquisition must report all of the tangible assets, intangible assets, goodwill, as well as the price paid for the acquired company and any non-controlling interest the acquirer had in the acquired company before the acquisition. This is known as the Purchase Method, and is the traditional method of accounting for acquisitions.

Of course it gets more detailed than that, for assets including accounts receivable, marketable securities, raw materials, finished goods, work- in-process, and so forth. There is a new Acquisition Method that has become the standard since 2008, though, which has some subtle differences from the Purchase Method.

For one thing, companies must disclose all “contingencies,” which include the possibility that some assets will be sold or cut loose in the new few years, or that there are lawsuits pending. Acquisition Method also does not ignore “bargain pricing” with negative goodwill, and instead negative goodwill is considered a gain.

There can be “tax-free” acquisitions, wherein a company defers taxes on any gains in the current year, if the acquisition meets the IRS’s definition of A, B, C. or D Restructuring.