Accounting For Acquisition 3 comments - Leave comment Topics:Financial Reporting, Merger and Acquisition Facebook Twitter Google+ On any

acquisition process, once due diligence and valuation of acquiree is completed, the process continued to recording (accounting the acquisition on the company!s book" #nd this task mostly be conducted by a general ledger specialist" Of course the $ontroller will want to review this area of accounting, since a mistake here can have a ma%or impact on overall corporate results" The only allowable method used is the purchase method" There are also many situations where a company merely makes a small investment in another company, rather than making an outright purchase" This requires three possible types of accounting, depending on the si&e of the investment and the degree of control attained over the sub%ect company'all three methods, which are the cost, equity, and consolidation methods. This post deals with the purchase method of accounting for an acquisition, as well as the cost, equity, and consolidation methods, which are used to describe purchases of varying proportions of another entity. I also address how to account for intercompany transactions between the acquirer and acquiree after the purchase is completed. Enjoy!

(ote: It is wort mentioning ere, t e terms merger and acquisition are not t e same t ing. An acquisition is w en !ot t e acquiring and acquired compan" are still le#t standing as separate entities at t e end o# t e transaction.

$urc ase Met od Acquisition Accounting

This approach to accounting for a business combination assumes that the acquiring company spreads the acquisition price over the assets being bought at their fair market value, with any remaining portion of the acquisition price being recorded in a goodwill account" The company being purchased can be bought with any form of consideration, such as stock, cash, or property .
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T ere are t ree primar" steps involved in accounting #or a purc ase transaction: () determining the purchase price* (+ allocating this price among the various assets of the company being purchased* and (, accounting for the first-year partial results of the purchased entity on the buyer!s financial statements . Let&s go into more detail o# t e steps. Read on' .tep-)" /etermining the 0urchase 0rice T e issue wit t e #irst step is t at t e purc ase price is !ased on t e #air mar(et value o# t e consideration given to t e seller. For e)ample: I# t e purc ase is made wit stoc(, t e stoc( must !e valued at its #air mar(et value. I# treasur" stoc( is used as part o# t e consideration, t en t is must also !e valued at its #air mar(et value. I# t e !u"er&s stoc( is t inl" traded or closel" eld, t en it ma" !e necessar" to o!tain t e services o# an investment !an(er or appraiser, w o can use various valuation models and industr" surve"s to derive a price per s are. .tep-+" #llocate 0urchase 0rice #mong 1arious #ssets of The $ompany 2eing 0urchased T e second step in t e purc ase met od is to allocate t e purc ase price among t e acquired compan"&s assets and lia!ilities, w ic are t en recorded in t e !u"er&s accounting records. T e met od o# valuation varies !" line item on t e acquired compan"&s !alance s eet. *ere are t e (e" rules on ow to allocate t e purc ase price among assets, lia!ilities and stoc( option o# compan" !eing purc ased: #ccounts 3eceivable + Record t is asset at its present value, less t e allowance #or !ad de!ts. ,iven t e e)ceedingl" s ort time #rame over w ic t is asset is outstanding, t ere is generall" no need to discount t is valuation, unless t ere are receiva!les wit ver" long collection terms. Also, since t e acquisition transaction is generall" not completed until several mont s a#ter t e acquisition date -given t e e##ort required to ma(e t e accounting entr"., t e amount o# t e allowance #or !ad de!ts can !e ver" precisel" determined as o# t e acquisition date. 4arketable .ecurities + T ese assets s ould !e recorded at t eir #air mar(et value. T is is an opportunit" #or t e !u"er to mar( up a securit" to its #air mar(et value -i# suc is t e case., since generall" accepted accounting principles -,AA$. normall" onl" allows #or t e recognition o# reductions in mar(et value. For t is reason, t is is an area in w ic t ere is some
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opportunit" to allocate an additional portion o# t e purc ase price !e"ond t e original cost o# t e asset. *owever, since most companies onl" invest in s ort-term, ig l" liquid securities, it is unli(el" t at t ere will !e a large amount o# potential appreciation in t e securities. 5nventory'raw 4aterials + T ese assets s ould !e recorded at t eir replacement cost. T is can !e a pro!lem i# t e acquiree is in an industr", suc as computer ardware, w ere inventor" costs drop at a rapid pace as new products come into t e mar(etplace. 0onsequentl", t e !u"er ma" #ind itsel# wit a signi#icantl" lower inventor" valuation as a result o# t e purc ase transaction t an originall" appeared on t e accounting records o# t e acquiree. 5nventory'finished Goods + T ese assets s ould !e recorded at t eir selling prices, less t eir average pro#it margin and disposition costs. T is can !e a di##icult calculation to ma(e i# t e #inis ed goods ave varia!le prices depending on w ere or in w at quantities t e" are sold1 in suc cases, t e determination o# selling price s ould !e !ased on a istor" o# t e most common sales transactions. For e)ample, i# 234 o# all units sold are in purc ase quantities t at result in a per unit price o# 5%.63, t en t is is t e most appropriate price to use. T is rule can !e avoided, owever, i# t e acquiree as #irm sales contracts as o# t e date o# t e acquisition wit speci#ic customers t at can !e used to clearl" determine t e prices at w ic t e #inis ed goods will actuall" !e sold. I# t e acquirer ad !een using a lastin, #irst-out -LIF7. inventor" valuation s"stem, t en t e newl" derived valuation #or t e #inis ed goods inventor" s all !e used as t e LIF7 !ase la"er #or all inventor" o!tained t roug t e purc ase transaction. 5nventory'work-in-process 67508 + T ese assets receive t e same valuation treatment as #inis ed goods, e)cept t at t e cost o# conversion into #inis ed goods must also !e su!tracted #rom t eir eventual sale price. 0roperty, 0lant, and 9quipment (00:9 + T ese assets s ould !e recorded at t eir replacement cost. T is can !e a di##icult tas( t at lengt ens t e interval !e#ore t e acquisition 8ournal entr" is completed, !ecause some assets ma" !e so old t at t ere is no equivalent product currentl" on t e mar(et, or equipment ma" !e so speciali9ed t at it is di##icult to #ind a reasona!le alternative on t e mar(et. T is valuation step #requentl" calls #or t e services o# an appraiser. 0roperty, 0lant, and 9quipment To 2e .old + I# t e !u"er intends to sell o## assets as o# t e acquisition date, t en t ese assets s ould !e recorded at t eir #air mar(et value. T is most accuratel" re#lects t eir disposal value as o# t e acquisition date.

$apital ;eases + I# t e acquiree possesses assets t at were purc ased wit capital leases, t en t e 0F7 s ould value t e asset at its #air mar(et value, w ile valuing t e associated lease at its net present value. 3esearch and /evelopment (3:/ #ssets + I# an" assets associated wit speci#ic R:; pro8ects are part o# t e acquiree, t e 0F7 s ould c arge t ese assets o## to e)pense i# t ere is no e)pectation t at t e" will ave an alternative #uture use once t e current R:; pro8ect as !een completed. T e precise allocation o# assets to e)pense or asset accounts can !e di##icult, since t e e)isting pro8ects ma" !e e)pected to last well into t e #uture, or t e #uture use o# t e assets ma" not !e eas" to determine. 0onsequentl", one s ould care#ull" document t e reasons #or t e treatment o# R:; assets. 5ntangible #ssets + T ese assets are to !e recorded at t eir appraised values. I# t e !u"er cannot reasona!l" assign a cost to t em or identi#" t em, t en no cost s ould !e assigned. #ccounts and (otes 0ayable + Accounts pa"a!le can t"picall" !e recorded at t eir current amounts as listed on t e !oo(s o# t e acquiree. *owever, i# t e accounts pa"a!le are not to !e paid #or some time, t en t e" s ould !e recorded at t eir discounted present values. T e same logic applies to notes pa"a!le1 since all !ut t e s ortest-lived notes will ave a signi#icantl" di##erent present value, t e" s ould !e discounted and recorded as suc . T is treatment is used on t e assumption t at t e !u"er would ot erwise !e purc asing t ese lia!ilities on t e date o# t e acquisition, not on a variet" o# dates stretc ing out into t e #uture, and so must !e discounted to s ow t eir value on t e acquisition date. #ccruals + T ese lia!ilities are t"picall" ver" s ort-term ones t at will !e reversed s ortl" a#ter t e current accounting period. Accordingl", t e" are to !e valued at t eir present value1 discounting is rarel" necessar". 0ension ;iability + I# t ere is an un#unded pension lia!ilit", even i# not recogni9ed on t e !oo(s o# t e acquiree, it must !e recogni9ed !" t e !u"er as part o# t e purc ase transaction. .tock Option 0lan + I# t e !u"er decides to ta(e over an e)isting stoc( option plan o# t e acquiree&s, t en it must allocate part o# t e purc ase price to t e incremental di##erence !etween t e price at w ic s ares ma" !e purc ased under t e plan and t e mar(et price #or t e stoc( as o# t e date o# t e acquisition. *owever, i# t e !u"er #orced t e acquiree to settle all claims under t e option plan prior to t e acquisition, t en t is !ecomes a compensation e)pense t at is recorded on t e !oo(s o# t e acquiree. Example:

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Lets say the acquiring company (Lie Dharma Corporation) buys the acquirees ( utra Corporations) stoc! "ith #$%%&%%% o' cash& the entry on Lie Dharmas boo!s "oul( be: )Debt*. +n,estment in utra Corporation - #$%%&%%% )Cre(it*. Cash - #$%%&%%% .lternati,ely& i' Lie Dharma "ere to ma!e the purchase using a mix o' /%0 cash an( 1%0 'or a note& the entry "oul( be: )Debt*. +n,estment in utra Corporation - #$%%&%%% )Cre(it*. Cash - #2%%&%%% )Cre(it*. 3ote payable - #4%%&%%% Anot er approac would !e to e)c ange 6,333 s ares o# Lie ; arma&s 5% par value stoc( #or t at o# $utra as a #orm o# pa"ment. =nder t is met od, t e entr" would !e: )Debit*. +n,estment in utra Corporation - #$%%&%%% )Cre(it*. Common stoc!5par ,alue - #$&%%% )Cre(it*. Common stoc!5a((itional pai(6in capital - #47$&%%% >e)t, still on t e second step, let&s sa" t e result o# all valuation process s own as t e #ollowing ta!le, w ere it s ows t e calculation t at would !e required to ad8ust t e !oo(s o# an acquiree in order to t en consolidate it wit t e results o# t e acquiring compan". T e a!ove ta!le s ows t e initial !oo( cost o# eac account on t e acquiree&s !alance s eet, #ollowed !" a listing o# t e required valuation o# eac account under t e purc ase met od, t e ad8ustment required, and t e new account valuation. T e new account valuation on t e rig t side o# t e ta!le can t en !e com!ined directl" into t e records o# t e acquiring compan". =nder t e ?0urchase 4ethod 1aluation@ column, a designation o# ?(01@ means t at t e net present value o# t e line item is s own, a designation o# ?F41@ means t at t e #air mar(et value is s own -less an" costs required to sell t e item, i# applica!le., ?3$@ designates t e use o# replacement cost, ?.;4@ designates t e use o# sale price less t e gross margin, and ?#1@ designates an asset&s appraised value. In t e ta!le, de!its and credits are speci#ied #or eac ad8usting entr" listed in t e ?3equired #d%ustment@ column. T e amount o# goodwill s own in t e ?3equired #d%ustment@ column is derived !" su!tracting t e purc ase price o# 5%6,333 #rom t e total o# all #air mar(et and ot er valuations s own
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in t e ?0urchase 4ethod 1aluation@ column. In t is case, we ave a #air mar(et valuation o# 5%2,3A2 #or all assets, less a #air mar(et valuation o# 52,3B6 #or all lia!ilities, w ic "ields a net #air mar(et value #or t e acquiree o# 5%3,3/3. C en t is #air mar(et value is su!tracted #rom t e purc ase price o# 5%6,333, we end up wit a residual o# 5<,DBB, w ic is listed in t e goodwill account. >ote t at t e ?#d%usted #cquiree 3ecords@ column on t e rig t side o# t e e) i!it still must !e added to t e acquirer&s records to arrive at a consolidated #inancial statement #or t e com!ined entities. .tep-," #ccount for the First-<ear 0artial 3esults of the 0urchased 9ntity on The 2uyer!s Financial .tatements T e t ird step in t e acquisition process is to account #or t e #irst "ear partial results o# t e acquired compan" on its !oo(s. 7nl" t e income o# t e acquiree t at #alls wit in its current #iscal "ear, !ut a#ter t e date o# t e acquisition, s ould !e added to t e !u"er&s accounting records. In addition, t e !u"er must c arge all costs associated wit t e acquisition to current e)penseEt e" cannot !e capitali9ed. T ese acquisition costs s ould !e almost entirel" #or outside services, since an" internal costs c arged to t e acquisition would li(el" ave !een incurred an"wa", even in t e a!sence o# t e acquisition. T e onl" variation #rom t is rule is t e costs associated wit issuing equit" to pa" #or t e acquisition1 t ese costs can !e recorded as an o##set to t e additional paid-in capital account. An additional item is t at a lia!ilit" s ould !e recogni9ed at t e time o# t e acquisition #or an" plant closings or losses on t e dispositions o# assets t at are planned as o# t at date1 t is is not an e)pense t at is recogni9ed at a later date, since we assume t at t e !u"er was aware at t e purc ase date t at some asset dispositions would !e required. I# t e acquirer c ooses to report its #inancial results #or multiple "ears prior to t e acquisition, it does not report t e com!ined results o# t e two entities #or "ears prior to t e acquisition. A reverse acquisition is one w ere t e compan" issuing its s ares or ot er pa"ment is actuall" t e acquiree, !ecause t e acquiring compan"&s s are olders do not own a ma8orit" o# t e stoc( a#ter t e acquisition is completed.

As, I have mentioned at the preface of this post, there are cases that buyers only obtain another companys stock that less than 5 ! where buyers does not have control right over it with various conditions. In those cases, there are" #$% cost method& #'% (quity )ethod& and #*% consolidation method. I am going to discuss these methods on the ne+t paragraphs. 8ea( on9

0ost Met od Acquisition Accounting The cost method is used to account for the purchase of another company!s stock when the buyer obtains less than +=> of the other company!s shares and does not have management control over it . T e !u"er does not ave control i# it cannot o!tain #inancial results #rom t e ot er compan" t at it needs to create entries under t e equit" met od, or i# it #ails to o!tain representation on t e Foard o# ;irectors, is #orced to relinquis signi#icant s are older rig ts, or t e concentration o# voting power is clearl" in evidence among a di##erent group o# s are olders. =nder t is met od, t e investing compan" records t e initial investment at cost on its !oo(s. It t en recogni9es as income an" dividends distri!uted !" t e investee a#ter t e investment date.

Gquit" Met od Acquisition Accounting

The equity method of accounting for an investment in another company is used when the investor owns more than +=> of the investee!s stock, or less than +=> but with evidence of some degree of management control over the investee, such as control over some portion of the investee!s 2oard of /irectors, involvement in its management activities, or the e?change of management personnel between companies" The method is only used when the investee is a corporation, partnership, or %oint venture, and when both organi&ations remain separate legal entities. @nder the equity method, the acquirer records its initial investment in the investee at cost. (+ample +' the initial in,estment in Company .:C "ere #2&%%%&%%% in exchange 'or o"nership o' 4%0 o' its common stoc!& then the entry on the boo!s o' the in,estor "oul( be:
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)Debit*. +n,estment in Company .:C - #2&%%%&%%% )Cre(it*. Cash - #2&%%%&%%% A#ter t e initial entr", t e investor records its proportional s are o# t e investee&s income against current income. (+ample +' the in,estee has a gain o' #2/%&%%%& the in,estor can recogni;e its 4%0 share o' this income& "hich is #41&%%%. <he entry "oul( be: )Debit*. +n,estment in Company .:C - #41&%%% )Cre(it*. +n,estment income - #41&%%% T e credit in t e last 8ournal entr" can more precisel" !e made to an =ndistri!uted Investment Income account, since t e #unds #rom t e investee&s income ave not actuall" !een distri!uted to t e investor. T e investor s ould also record a de#erred income ta) e)pense !ased on an" income attri!uted to t e investee. (+ample <o continue "ith the prece(ing example& i' the incremental tax rate 'or the in,estor is =10& then it "oul( recor( the 'ollo"ing entry that is base( on its #41&%%% o' Company .:Cs income: )Debit*. +ncome tax expense - #21&/4% )Cre(it*. De'erre( taxes - #21&/4% I# t e investee issues dividends, t en t ese are recorded as an o##set to t e investment account and a de!it to cas . ;ividends are not recorded as income, since income was alread" accounted #or as a portion o# t e investee&s income, even t oug it ma" not ave !een received. (+ample +' (i,i(en(s o' #/$&%%% are recei,e( 'rom Company .:C& the entry "oul( be: )Debit*. Cash - #/$&%%% )Cre(it*. +n,estment in Company .:C - #/$&%%% I# t e mar(et price o# t e investor&s s ares in t e investee drops !elow its investment cost, t ese are not normall" an" grounds #or reducing t e amount o# t e investment. *owever, i# t e loss in mar(et value appears to !e permanent, t en a loss can !e recogni9ed and c arged against current earnings. Gvidence o# a permanent loss in mar(et value would !e a long2

term drop in mar(et value t at is su!stantiall" !elow t e investment cost, or repeated and su!stantial reported losses !" t e investee, wit no prospects #or an improvement in reported earnings. (+ample +' the mar!et price o' the stoc! in Company .:C necessitate( a (o"n"ar( a(justment in the in,estors ,aluation& the entry "oul( be: )Debit*. Loss on in,estments - #$%&%%% )Cre(it*. +n,estment in Company .:C - #$%&%%% I#, a#ter ma(ing a downward ad8ustment in its investment, t e investor #inds t at t e mar(et price as su!sequentl" increased, it cannot return t e carr"ing amount o# t e investment to its original level. T e new !asis #or t e investment is t e amount to w ic it as !een written down. T is will increase t e si9e o# an" gain t at is eventuall" recogni9ed on t e sale o# t e investment. I# t e investee e)periences an e)traordinar" gain or loss, t e investor s ould record its proportional s are o# t is amount as well. *owever, it is recorded separatel" #rom t e usual investment accounts. (+ample +' Company .:C "ere to experience an extraor(inary loss o' #2$&%%%& the entry "oul( be: )Debit*. >n(istribute( extraor(inary loss - #2$&%%% )Cre(it*. +n,estment in Company .:C - #2$&%%% I# t e investee e)periences suc large losses t at t e investor&s investment is reduced to 9ero, t e investor s ould stop recording an" transactions related to t e investment in order to avoid recording a negative investment. I# t e investee eventuall" records a su##icient amount o# income to o##set t e intervening losses, t en t e investor can resume use o# t e equit" met od in reporting its investment. I# t e investor loses control over t e investee, t en it s ould switc to t e cost met od o# reporting its investment. C en it does t is, its cost !asis s ould !e t e amount in t e investment account as o# t e date o# c ange. *owever, t e same rule does not appl" i# t e investor switc es #rom t e cost met od to t e equit" met odEin t is case, t e investor must restate its investment account to re#lect t e equit" met od o# accounting #rom t e date on w ic it made its initial investment in t e investee.
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C en reporting t e results o# its investment in anot er compan" under t e equit" met od, t e investor s ould list t e investment in a single Investment in Hu!sidiar" line item on its !alance s eet and in an Investment Income line item on its income statement.

0onsolidation Met od
7hen a company buys more than A=> of the voting stock of another company, but allows it to remain as a separate legal entity, then the financial results of both companies should be combined in a consolidated set of financial statements. *owever, i# t e companies are involved in entirel" di##erent lines o# !usiness, it ma" still !e appropriate to use t e equit" met od1 ot erwise, t e com!ined results o# t e two enterprises could lead to misleading #inancial results.For e?ample: i# a so#tware compan" wit A34 gross margins com!ines wit a steel rolling #acilit" w ose gross margins are in t e /64 range -!ot !eing t"pical margins #or t eir industries. t e !lended gross margin presents a misleading view o# t e gross margins o# !ot entities. Anot er case in w ic a 634I level o# owners ip mig t not result in t e use o# a consolidation is w en t e investing compan" onl" e)pects to ave temporar" control over t e acquiree or i# t e !u"er does not ave control over t e acquiree -per aps !ecause control is e)ercised t roug a small amount o# restricted voting stoc(.. In eit er case, t e equit" met od s ould !e used. C en constructing consolidated #inancial statements, t e preacquisition results o# t e acquiree s ould !e e)cluded #rom t e #inancial statements. I# t ere is a "ear o# divestiture, t e #inancial results o# t e acquiree in t at "ear s ould onl" !e consolidated up until t e date o# divestiture.

$ost-Acquisition Intercompan" Transactions 7hen the acquirer elects to report consolidated financial information, it must first eliminate all intercompany transactions" 2y doing so, it eliminates any transactions that represent the transfer of assets and liabilities between what are now essentially different parts of the same company.T e transactions t at s ould !e eliminated are: 5ntercompany .ales, #ccounts 3eceivable and 0ayable + T e most common intercompan" transaction is t e account receiva!le or pa"a!le associated wit t e trans#er o# goods !etween divisions o# t e
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parent compan". From t e perspective o# someone outside t e consolidated compan", t ese accounting transactions ave not reall" occurred, since t e associated goods or services are merel" !eing moved around wit in t e compan" and are not caused !" a !usiness transaction wit an outside entit". Accordingl", #or consolidation purposes, all intercompan" accounts receiva!le, accounts pa"a!le, and sales are eliminated. 5ntercompany 2ad /ebts + A !ad de!t #rom anot er division o# t e same compan" cannot !e recogni9ed, since t e associated sale and account receiva!le transaction must also !e eliminated as part o# t e consolidation process. In s ort, i# t e sale never occurred, t en t ere cannot !e a !ad de!t associated wit it. 5ntercompany /ividend 0ayments + T is is merel" a trans#er o# cas !etween di##erent divisions o# t e corporate parent, and so s ould !e invisi!le on t e consolidated statement. 5ntercompany ;oans and any #ssociated /iscounts, 0remiums, and 5nterest 0ayments + T oug t ere are good reasons #or using intercompan" loans, suc as t e provision o# #unds to ris(" su!sidiaries t at mig t not !e a!le to o!tain #unds !" ot er means, t is is still 8ust a trans#er o# mone" wit in t e compan", as was t e case #or intercompan" dividend pa"ments. T us, it must !e removed #rom t e consolidated #inancial statements. 5ntercompany 3ent 0ayments + T is is a #orm o# intercompan" pa"a!le, and so is not allowed. Fi?ed #sset .ale Transactions + C en #i)ed assets are sold #rom one su!sidiar" to anot er, t e selling compan" will eliminate t e associated accumulated depreciation #rom its !oo(s as well as recogni9e a gain or loss on t e transaction. T ese entries must !e reversed, since t e #i)ed asset as not le#t t e consolidated organi9ation. 5ntercompany 0rofits + A common issue #or verticall" integrated companies is t at multiple su!sidiaries recogni9e pro#its on component parts t at are s ipped to ot er su!sidiaries #or #urt er wor(. 7n a consolidated !asis, all o# t ese intercompan" pro#its must !e eliminated, since t e onl" pro#it gained #rom t e consolidated perspective is w en t e completed product is #inall" sold !" t e last su!sidiar" in t e production process to an outside entit". 5ntercompany 5nvestments + T e corporate parent&s investment in an" su!sidiaries is removed #rom t e consolidation. For e)ample, i# a corporate parent created a su!sidiar" and invested a certain amount o# equit" in it, t is investment would appear on t e !oo(s o# !ot t e
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parent -as an investment. and t e su!sidiar" -as equit".. In a consolidation, !ot entries are removed. #ll intercompany eliminations are recorded on a separate consolidation worksheet" They are not recorded on the books of any of the subsidiaries or the parent company" 5n essence, these transactions are invisible to all but the $ontroller, who is responsible for the consolidation reporting. T e Acquisition Met od o# Accounting C en an acquiree !u"s anot er compan" and t e acquirer uses ,AA$, it must record t e event under t e acquisition met od. T is approac mandates a series o# steps to record t e acquisitions, w ic are: %. Measure an" tangi!le assets and lia!ilities t at were acquired /. Measure an" intangi!le assets and lia!ilities t at were acquired 3. Measure t e amount o# an" noncontrolling interest in t e acquired !usiness <. Measure t e amount o# consideration paid to t e seller 6. Measure an" goodwill or gain on t e transaction Ce will deal wit eac o# t ese steps !elow. )" 4easure Tangible #ssets and ;iabilities Measure tangi!le assets and lia!ilities at t eir #air mar(et values as o# t e acquisition date, w ic is t e date w en t e acquirer gains control over t e acquiree. T ere are a #ew e)ceptions, suc as lease and insurance contracts, w ic are measured as o# t eir inception dates. *owever, most assets and lia!ilities s ould !e measured as o# t e acquisition date. T is #air value anal"sis is #requentl" done !" a t ird-part" valuation #irm. +" 4easure 5ntangible #ssets and ;iabilities Measure intangi!le assets and lia!ilities at t eir #air mar(et values as o# t e acquisition date, w ic is t e date w en t e acquirer gains control over t e acquiree. T is tends to !e a more di##icult tas( #or t e acquirer t an t e
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measurement o# tangi!le assets and lia!ilities, since t e acquiree ma" not ave recorded man" o# t ese items on its !alance s eet. ," 4easure (oncontrolling 5nterest Measure and record t e noncontrolling interest in t e acquiree at its #air value on t e acquisition date. T e #air value can !e derived #rom t e mar(et price o# t e stoc( o# t e acquiree, i# an active mar(et #or it e)ists. T is amount is li(el" to !e less per s are t an t e price t e acquirer paid to !u" t e !usiness, since t ere is no control premiumassociated wit t e noncontrolling interest. B" 4easure $onsideration 0aid T ere are man" t"pes o# consideration t at ma" !e paid to t e seller, including cas , de!t, stoc(, a contingent earnout, and ot er t"pes o# assets. >o matter w at t"pe o# consideration is paid, it is measured at its #air value as o# t e acquisition date. T e acquirer s ould include in t is consideration calculation t e amount o# an" #uture pa"ment o!ligations, suc as earnouts. A" 4easure Goodwill or 2argain 0urchase Gain A#ter all o# t e preceding steps ave !een completed, t e acquirer must !ac( into t e amount o# an" goodwill or gain on a !argain purc ase !" using t e #ollowing calculation: 0onsideration paid I >oncontrolling interest + Identi#ia!le assets acquired I Identi#ia!le lia!ilities acquired I# t is calculation results in a !argain purc ase -#ormerl" (nown as negative goodwill., t en t e acquirer as paid less #or t e acquiree t an t e #air values o# its assets and lia!ilities indicate t at it is wort . A !argain purc ase is recogni9ed as a gain as o# t e acquisition date. .ummary T e man" steps noted ere to record an acquisition cannot alwa"s !e completed in time to !e accuratel" recorded in t e accounting period w en an acquisition is completed. I# it appears t at t e accounting will !e dela"ed, t e acquirer s ould report its !est estimates in t e relevant accounting period, and t en ad8ust t ose #igures later, !ased on #acts and circumstances t at e)isted as o# t e acquisition date. In#ormation arising at a later date
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ma" result in su!sequent c anges to asset and lia!ilit" values, !ut t e" s ould not !e used to retroactivel" ad8ust t e recordation o# t e original acquisition entr". 3elated Topics Acquisition anal"sis Acquisition target identi#ication T e ostile ta(eover Ta)-#ree acquisitions T e triangular merger

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