What is acquisition accounting?
Acquisition accounting (also called business-combination accounting) is the set of rules a buyer uses to record a business purchase on its consolidated balance sheet. The acquirer identifies the fair market value (FMV) of the acquired company’s identifiable assets and liabilities at the acquisition date, allocates the purchase price to those items, and records any residual as goodwill. Non-controlling interest (NCI) — ownership in the target retained by outside shareholders — is also measured and reported on consolidation.
Key concepts (definitions)
– Fair market value (FMV): the price a willing third party would pay for an asset or assume for a liability in an open market at the acquisition date.
– Identifiable net assets: the fair-valued tangible and intangible assets acquired minus liabilities assumed.
– Goodwill: the excess of purchase consideration over the FMV of identifiable net assets; represents synergies, assembled workforce, reputation, and other unidentifiable benefits.
– Non-controlling interest (NCI): the portion of the target not owned by the acquirer; it must be measured and presented on the consolidated statement of financial position.
How acquisition accounting works — core steps
1. Identify the acquirer and the acquisition date (the date control passes).
2. Determine total consideration transferred (cash, stock, contingent consideration, etc.).
3. Measure identifiable assets acquired and liabilities assumed at FMV as of the acquisition date. Valuation specialists are often used.
4. Calculate identifiable net assets = FMV of assets − FMV of liabilities.
5. Recognize goodwill = consideration transferred − identifiable net assets (if positive). If consideration is less than identifiable net assets, recognize an immediate gain (bargain purchase gain).
6. Measure and present non-controlling interest at the required basis.
7. Disclose required information in the financial statements (including valuation methods and assumptions).
Short checklist for accountants and analysts
– Confirm who is the acquirer and the official acquisition date.
– Tally all consideration elements (cash, shares, contingent payments).
– Obtain FMV estimates for major asset and liability classes (property, inventory, contracts, contingencies, financial instruments).
– Decide whether to engage third-party valuation specialists.
– Compute identifiable net assets and goodwill (or bargain gain).
– Measure and record NCI per applicable guidance.
– Prepare reconciliation and disclosures required by accounting standards.
– Plan for integration, subsequent impairment testing of goodwill, and post-close accounting adjustments.
Simple numeric example
– Purchase price paid by Acquirer = $1,000 million.
– FMV of identifiable assets acquired = $1,200 million.
– FMV of liabilities assumed = $600 million.
– Identifiable net assets = 1,200 − 600 = $600 million.
– Goodwill = purchase price − identifiable net assets = 1,000 − 600 = $400 million.
If instead the purchase price were $550 million, then goodwill = 550 − 600 = −$50 million. Under acquisition accounting the negative amount is not capitalized as “negative goodwill”; it is recognized immediately as a gain of $50 million on the acquirer’s income statement.
History and rationale (brief)
Major accounting standard-setters (the U.S. FASB and the IASB) replaced the older “purchase method” with acquisition/business-combination accounting in 2008. The change emphasized measurement at fair value and improved transparency by requiring recognition of contingencies and non-controlling interests. One practical effect: bargain purchases produce immediate gains instead of being amortized over time.
Practical complexities to expect
– Determining FMV for intangible assets, contingent liabilities, customer contracts, and hedging instruments can be time-consuming and judgmental.
– Third-party valuation work is common and often needed for substantiation.
– The volume of adjustments slows closing processes; consolidation work and integration of accounting systems can extend the time from agreement to closing.
– Goodwill is not amortized; it is subject to subsequent impairment testing under applicable standards.
Sources for further reading
– Investopedia — Acquisition Accounting overview: https://www.investopedia.com/terms/a/acquisition-accounting.asp
– IFRS Foundation — IFRS 3 Business Combinations (standard and guidance): https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/
– Financial Accounting Standards Board (FASB) — Topic on Business Combinations (ASC 805): https://www.fasb.org
– PwC — Practical guides on accounting for business combinations: https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/business-combinations.html
Educational disclaimer
This explainer is educational and does not constitute individualized accounting or investment advice. For application to a specific transaction, consult the relevant accounting standard, your auditor, or a qualified valuation specialist.