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Acquisition accounting is a specific set of transactions and reporting guidelines unique to situations where one company is acquired by another. In these cases, the assets and liabilities of the acquired company must be reported by the purchaser as appropriate. There are several key elements to be aware of in an acquisition:

The fair market value of the acquired company is the first step to accounting for an acquisition. This figure is used to allocate the purchase price between the tangible and intangible assets of the acquired company. Tangible assets can generally be identified on the balance sheet and are usually those with a long-term economic value. Intangible assets, such as patents or trademarks, have no physical form but can provide economic value long-term. Any difference between the fair market value and the purchase price of the acquired company is known as goodwill.

Goodwill is recorded on the purchaser’s balance sheet and represents the premium paid over the fair market value of the assets acquired. Goodwill must be evaluated periodically to ensure that its value is still appropriate. It is also important to consider any non-controlling interests in an acquisition, as those interests must be accounted for accurately.

In addition to the assets and liabilities of the acquired company, the new entity should be reported as a separate entity by the purchaser. This is to ensure that any impact of the acquisition is reflected accurately on the balance sheet and in financial statements. For example, the assets held by the new entity should be reported according to the accounting methods used by the purchaser. This can include such areas as inventory, receivables, fixed assets and deferred tax liabilities.

Acquisition accounting is an important process that must be considered if a company is purchased by another. While the fair market value of the acquired company is allocated to the tangible and intangible assets on the balance sheet, the excess is recorded as goodwill. Non-controlling interests should also be considered, and the new entity should be reported separately as appropriate. Following these guidelines can help ensure accurate financial reporting and compliance with accounting standards.