Acquisition accounting calculates the fair market value of a newly acquired business to update financial records. This involves determining the value of assets and liabilities, with any leftover funds considered goodwill. The process can be challenged and reviewed by regulators to ensure proper accounting standards are followed. Specialized accountants can be hired as consultants to ensure accuracy.
Acquisition accounting is the process of calculating the fair market value of a newly acquired business with the aim of accurately entering it into the parent company’s financial records. The books will be updated to reflect the information and, in the case of publicly traded companies, this financial information will be discussed in annual reports and other financial disclosures, as required by law. This allows members of the public to see how much companies paid for acquisitions and what kind of value they received in return.
In acquisition accounting, people take book value – the amount a company pays to acquire another company – and convert it to fair market value. This is done by determining the value of assets, both tangible and intangible, such as manufacturing equipment and patents, as well as considering liabilities. When all this is balanced, funds can be left over. These funds are considered “goodwill,” reflecting the premium a company paid for the acquisition. The goodwill amount is recorded along with the market value to accurately account for the entire purchase price.
The acquisition accounting process can take time. Usually, a team of accountants is involved, reviewing the acquired company’s accounts, analyzing the fair market value of comparable assets, and so on. They prepare a detailed report showing the methods they used and the sums they arrived at to accurately distribute the newly acquired company’s value in the parent company’s financial records. If there are disputes, accounting can be challenged.
Shareholders or others who suspect acquisition accounting is not being performed properly can request a review by government regulators if a company is publicly traded. These regulators will inspect financial records to determine whether accountants have used acceptable standards and practices in their work. If not, investigators will determine whether it is an innocent mistake or evidence of fraud, such as trying to boost asset values to make a company look like a better buy.
Some accountants specialize in mergers and acquisitions and have extensive experience in topics such as acquisition accounting. They can be hired as consultants in these cases to ensure that the accounting is done right the first time by someone familiar with all the rules and regulations. Once the job is completed, the accountant’s contract ends and you can look for work with another company.
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