Introduction to Acquisition Method of Accounting

Question 1

Does the acquisition method of accounting apply to all business combinations?

Answer 1

Yes, it applies to all three methods.

Question 2

What are the 5 steps to acquisition method of accounting?

Answer 2

1) Identify the acquirer
2) Determine acquisition date
3) determine the cost of the business (what you give)
4) Recognize and measure the assets and liabilities you receive and any non controlling interest
4) Recognize and measure goodwill

Question 3

How do you identify who is the acquirer?

Answer 3

Most likely the entity distributing cash and incurring additional assets and liabilities. The entity that owns more than 50% of the other entity. Look at the relative voting rights and the composition of the management after the transaction.

Question 4

What is the acquisition date?

Answer 4

Date the entity obtains control. it can be before the or after the closing date. It is the DATE CONTROL TAKES PLACE!!

Question 5

What are costs related to an acquisition? How do you account for these costs?

Answer 5

Acquisition costs are costs of carrying out the business combination (advising, legal, accounting, appraisal, and other professional fees).

These costs are expensed as incurred!! (This is not to be confused with transaction costs for issuing registering or issuing securities, this will reduce the debt or reduce APIC)

Question 6

How do you determine income?

Answer 6

At the date of acquisition- only the acquirer

Subsequent to Acquisition- Both are combined