Acquisition Accounting Explained
Overview
Acquisition accounting, also known colloquially as purchase accounting, plays a critical role when one company swallows another (hopefully without indigestion). It is the ensemble of fiscal aerobics performed to ensure that financial statements after an acquisition are not only comprehensive but also compliant with bustling standards like laughter at a board meeting.
The Nuts and Bolts
When Company A decides Company B is too good to just be friends and buys it, acquisition accounting steps into the limelight. The fair value of what Company A pays must be meticulously divided among Company B’s net tangible and intangible assets (excluding goodwill because, let’s face it, goodwill is the office plant of assets—important but hard to quantify).
If Company A ends up paying more than the sum of these fair values, this excess gets labeled as goodwill—a kind of financial “hope” for future benefits. This financial charisma added to the balance sheet often mirrors the mystery of why people buy popcorn at the cinema despite the price.
Practical Implications
From the moment the acquisition ink dries, the acquired entity’s financial results get a VIP pass to the consolidated profit and loss account of the acquirer. This only applies from the acquisition date because dragging past baggage into new relationships is, as personal experience would suggest, a no-go.
Governance
For those under the UK and Republic of Ireland’s financial umbrella, Section 19 of the Financial Reporting Standard comes into play, ensuring everyone plays by the rules. Meanwhile, across various ponds, entities adhering to International Financial Reporting Standard 3: Business Combinations are also making sure that acquisition accounting is as by the book as a library database.
Related Terms
- Fair Value: A party-value but for assets, establishing what someone would pay in the open market without coercion or garage sale tactics.
- Goodwill: The accounting version of paying extra for a brand because you believe in its potential, much like betting on a horse because you like its name.
- Consolidated Profit and Loss Account: Where all company financial results gather and try to get along.
- Merger Accounting: Its close cousin, dealing with the financial impact when two companies decide to stop competing and start completing each other.
Sage Advice on the Shelves
For those hungry for more than a snackable byte of knowledge, consider diving into these tomes:
- “Accounting for Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis – an educational feast on the accounting banquet.
- “Advanced Financial Accounting” by Richard Lewis and David Pendrill - a sophisticated journey through the intricacies of financial reporting.
Understanding acquisition accounting isn’t just for the ledger-loving kind or those who light up at spreadsheets. It’s for anyone curious about the financial wizardry that makes businesses grow, merge, and occasionally, magically transform. All ably guided by the steady hand of standards and the occasional financial Gandalf.
