The Acquisition Method illustrated

The short case:

The company A Corp is purchasing all shares in B Corp. Control is acquired by A Corp, B Corp disappears from the economic entity, and B or B’s shareholders receive either A Corp stock or other property. This will result in a business combination which means A Corp’s acquisition of control over the business of B Corp. The Acquisition Method illustrated The Acquisition Method illustrated

The acquisition will be accounted for as a ‘purchase’, this means that the acquired assets will be entered on the acquirer’s (A Corp’s) books at their current cost to it and liabilities will be credited at their current values; i.e., the total purchase price will be allocated among the individual assets and liabilities acquired to the extent of their fair market values. This is one of the two most important consequences of accounting for the combination as a purchase, for it means that, in the usual case, where current cost is higher than the seller’s book carrying value, the buyer’s future income statements will be charged with greater expenses than the seller’s statements would have shown as these assets are depreciated or amortized. The result is that the increment in the buyer’s income’resulting from the acquisition usually will be less than the seller’s income would have been without the combination. The Acquisition Method illustrated The Acquisition Method illustrated

In the past ‘pooling of interest’ was allowed, the accounting for such a pooling of interests is radically different from purchase accounting and rests on the notion that when two entities come together, with the interests in rights and rewards of the owners of each continuing, the old basis of accounting for each should continue. This means that the book carrying values of the assets and liabilities of each entity are continued on the books of the new or surviving entity and the earned surpluses of the two were combined. But that is the past!!

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