What is an acquisition cost?
An acquisition cost (or cost of acquisition) is the total amount a company records as the cost to obtain an asset, business, or customer — after applying discounts and adding necessary incidental expenditures, but typically before sales taxes. The term is used in three common contexts:
– Asset purchases (equipment, property) — the costs capitalized as the asset’s recorded basis.
– Business combinations — the amount paid to buy another company or business unit.
– Customer acquisition — the marketing and sales spend required to win a new customer (often called CAC).
Why it matters
Acquisition costs affect investment decisions, reported earnings, tax treatment, pricing and competitive position. Tracking them lets managers judge whether an acquisition or a procurement approach makes economic sense and helps analysts compare returns across projects.
Key components (what to include)
Typical items that get included when calculating an acquisition cost for an asset or business:
– Purchase price (net of any vendor discounts or rebates)
– Direct transportation and freight to place the asset in service
– Installation and testing costs required to make the asset operational
– Legal, due-diligence, broker, or advisory fees tied to the purchase or closing
– Closing costs and transfer fees
– Any nonrefundable deposits applied to the purchase
Items often excluded or treated separately:
– Sales tax or VAT is normally treated according to local tax rules (some rules exclude it from capitalization)
– Routine operating expenses or financing interest (unless capitalization rules allow)
– Post-acquisition restructuring costs (usually expensed)
How acquisition costs are treated in the financial statements
– Tangible asset purchases: capitalized on the balance sheet as the asset’s basis, then depreciated (or amortized) over the asset’s useful life. Depreciation expense hits the income statement over time.
– Business acquisitions: purchase price is allocated to identifiable assets and liabilities at fair value. If the purchase price exceeds those fair values, the excess is recorded as goodwill — an intangible asset that is not an immediate expense but is tested for impairment periodically.
– Customer acquisition costs: often expensed as incurred under many accounting frameworks, though some customer-related costs may be capitalized if specific criteria are met.
How acquisition costs affect taxes
Taxes can raise acquisition costs (import duties, VAT, sales taxes). Tax authorities also set rules for whether particular costs can be deducted immediately or must be capitalized and recovered over time. For example, many startup-related expenditures have special IRS rules about capitalization and amortization. Always check local tax guidance.
Differentiation from other cost categories
– Operating expenses (OPEX): ongoing costs to run the business (rent, utilities, salaries) — normally expensed as incurred.
– Cost of goods sold (COGS): direct costs of producing goods for sale — recognized when inventory is sold.
– Acquisition cost (as defined here): costs to obtain an asset or business and ready it for use; capitalized and amortized/depreciated unless rules say otherwise.
Role in pricing and strategy
High acquisition costs reduce margin headroom and may require higher selling prices to preserve target margins. They also influence decisions to insource vs. outsource, to pursue mergers and acquisitions, and to design procurement strategies that balance cost, quality, and delivery risk.
Short checklist: how to calculate and document acquisition costs
1. Identify the type of acquisition (asset, business, customer).
2. List direct purchase price and any vendor discounts.
3. Add necessary incidental costs (freight, installation, legal, due diligence).
4. Exclude or separately track taxes and routine operating costs per local rules.
5. Confirm timing: when was each cost incurred and paid? (Some costs may be paid later but relate to the acquisition.)
6. Determine accounting treatment (capitalize vs expense) under applicable standards.
7. Record in accounting system and retain supporting invoices and contracts for audits.
8. Review tax rules for deductibility, capital allowance, or amortization schedules.
Worked numeric example (equipment purchase)
Assume a company buys a machine with these items:
– List price: $100,000
– Vendor discount: 5% → net price = $95,000
– Freight to site: $2,000
– Installation and testing: $3,000
– Legal/closing fee for purchase contract: $1,500
– Sales tax (state): $6,000 (treated according to local tax rules; assume excluded from capitalization here)
Acquisition cost calculation (capitalized basis):
Net price 95,000
+ Freight 2,000
+ Installation/testing 3,000
+ Legal/closing 1,500
= Capitalized acquisition cost: $101,500
If the company depreciates the machine straight-line over 10 years with no salvage value:
Annual depreciation expense = 101,500 / 10 = $10,150 per year.
If instead the purchase was a business and the buyer paid $120,000 but identified net identifiable assets fair value = $100,000, the excess $20,000 would be recorded as goodwill on the balance sheet and tested for impairment going forward.
Practical tips
– Keep detailed invoices and allocation schedules for auditors and tax filings.
– Separate one-time acquisition-related costs from ongoing operating costs for clearer profitability analysis.
– When evaluating M&A, compute post-acquisition debt and funding mix — financing acquisition costs with debt affects leverage and interest expense.
– Compare acquisition cost per unit or per customer across options to guide procurement and marketing strategy.
Sources for further reading
– Investopedia — Acquisition Cost: https://www.investopedia.com/terms/a/acquisition-cost.asp
– Internal Revenue Service (IRS) — Startup costs: https://www.irs.gov/businesses/small-businesses-self-employed/startup-business-deductions
– U.S. Securities and Exchange Commission (SEC) — Goodwill and impairment: https://www.sec.gov/fast-answers/answersgoodwillhtm.html
– PwC — Business combinations / purchase accounting overview: https://www.pwc.com/us/en/services/accounting-advisory/business-combinations.html
Educational disclaimer
This explainer is for educational purposes only. It is not individualized tax, accounting, or investment advice. Consult qualified accountants, tax advisors, or legal counsel for decisions that affect your specific situation.