Acquisition Accounting

Acquisition accounting is the process of recording and reporting the acquisition of a business or asset in the financial statements of the acquiring company. The goal of acquisition accounting is to provide investors and other stakeholders with a fair and accurate representation of the financial impact of the acquisition on the acquiring company.

There are two main methods of acquisition accounting: the purchase method and the pooling of interests method. The purchase method is the most common method and is used when the acquirer obtains control of the acquired company in exchange for cash, other assets, or a combination of cash and assets. The pooling of interests method is used when the acquirer obtains control of the acquired company in exchange for stock.

Under the purchase method, the acquirer records the acquisition at the fair value of the consideration transferred to the seller. The fair value of the consideration transferred is determined based on the market value of the acquirer's stock, the fair value of the acquired company's assets, or a combination of the two. The acquirer also records goodwill, which is the difference between the fair value of the acquired company and the fair value of its net assets. Goodwill is amortized over a period of 10 years.

Under the pooling of interests method, the acquirer records the acquisition at the book value of the acquired company's assets. The book value of the acquired company's assets is determined based on the acquired company's financial statements. Goodwill is not recorded under the pooling of interests method.

The choice of acquisition method has a significant impact on the financial statements of the acquiring company. The purchase method results in a higher purchase price and a higher amount of goodwill, which can lead to lower earnings per share and a higher debt-to-equity ratio. The pooling of interests method results in a lower purchase price and a lower amount of goodwill, which can lead to higher earnings per share and a lower debt-to-equity ratio.

Acquisition accounting is a complex topic and there are many nuances that can affect the accounting treatment of an acquisition. It is important to consult with a qualified accountant to ensure that the acquisition is accounted for in accordance with GAAP.