Purchase vs Acquisition (Method of Accounting)
Mergers and acquisitions are complex scenarios in which one firm combines/purchases another firm’s assets, liabilities, technology, knowhow, innovation, patents, trademarks, etc. The accounting methodologies that are used in the process of recording such large transactions are also quite complex. Two such accounting methods are acquisition accounting and purchase accounting. Both these methods are aimed at providing an accurate record of the merger and acquisitions in the accounting books. There are a number of similarities between acquisition accounting and purchase accounting, yet one method may be preferred over another method depending on the company’s accounting policies and accountant’s opinions. The article offers a clear explanation on both purchase and acquisition accounting and shows how these methods are similar and different to one another.
Acquisition Method of Accounting
The acquisition method is broken down into two different types of accounting: acquisition accounting and merger accounting. When this method in accounting is used any acquisition that is done should be accounted for at the acquired asset’s fair value. The fair value is the true representation of the value of the asset. When using the acquisition method of accounting, the difference between the price that was paid at the time of purchase and the fair value will be recorded as goodwill in the company’s balance sheet.
Purchase Method of Accounting
The purchase method of accounting is quite similar to the acquisition method of accounting. The company that is being acquired will be listed at its fair value and the difference between the fair value and purchase price will be recorded as goodwill. The purchase method does not allow a company to create a provision for restructuring to account for any future losses or costs associated to restructuring that occur during the acquisition. This is because the losses that are incurred in an acquisition are a part of the cost of the acquisition and should be treated as such. Such a treatment will clearly show how the profits are affected by restructuring costs without displaying an exaggerated profit figure.
What is the difference between Purchase and Acquisition Method?
Acquisition accounting and purchase accounting are both accounting methods that are used in the process of recording mergers and acquisitions. These methods appear to be quite similar to each other in that they are both based on the fair value method and they both record the difference between the fair value and purchase price as goodwill. Despite these similarities, there are a number of differences between the two. The purchase method in accounting is the new standard that is being used as opposed to the older acquisition accounting method. The purchase method is seen to be more accurate than the acquisition method as any losses that are associated with the acquisition must be reported immediately. The acquisition method may in contrast, give way to some ‘creating accounting’. It is true that the purchase method may make the financials look a bit worse than upfront, but this accounting method shows the true picture which will be beneficial to the firm’s long term financial health.
Summary:
Purchase vs Acquisition Method
• There are 2 accounting methods; namely, acquisition accounting and purchase accounting that are used in recording large transactions such as mergers and acquisitions.
• The purchase method in accounting is the new standard that is being used as opposed to the older acquisition accounting method.
• The purchase method of accounting is quite similar to the acquisition method of accounting in that, in both methods, the company that is being acquired will be listed at it’s fair value and the difference between the fair value and purchase price will be recorded as goodwill.
• However, the purchase method does not allow a company to create a provision for restructuring to account for any future losses or costs associated to restructuring that occur during the acquisition.
• The purchase method is seen to be more accurate than the acquisition method as any losses that are associated with the acquisition must be reported immediately.