Acquisition Accounting

Acquisition accounting is a set of formal guidelines describing how assets, liabilities, non-controlling interest and goodwill of a target company must be reported by a purchasing company on its consolidated statement of financial position. With acquisition accounting the fair market value of the acquired firm is allocated between the net tangible and intangible assets portion of the balance sheet of the acquiring firm; the difference is regarded as goodwill. Also called "business combination accounting."

International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) require all business combinations to be treated as acquisitions for accounting purposes, meaning that one company must be identified as an acquirer and one company must be identified as an acquiree even if the transaction creates a new company. In the past, a method called "purchase accounting" was used in business combination accounting, but standard changes made acquisition accounting the only acceptable method because it strengthened the concept of fair value. Acquisition accounting focuses on prevailing market values in a transaction and includes contingencies and non-controlling interests, which were not accounted for under the purchase method.

The method of acquisition accounting improved transparency of M&A but did not make the process of combining financial records easier. Each component of assets and liabilities of the acquired entity has to be adjusted for fair value in items ranging from inventory and contracts to hedging instruments and contingencies, to name just a few. The amount of work needed to adjust and integrate the books of the two companies is one main reason for the long period between agreement on a deal by the respective boards of directors and the actual deal closing.