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What is Acquisition Accounting?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 05 November 2016
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    Conjecture Corporation
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Acquisition accounting is the process of calculating the fair market value of a newly acquired company for the purpose of entering it accurately in the financial records of the parent company. The books will be updated to reflect the information and in the case of publicly traded companies, this financial information will be discussed on 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 got in return.

In acquisition accounting, people take the book value — the amount a company pays to acquire another company — and convert it into the fair market value. This is done by determining the value of assets, both tangible and intangible, such as manufacturing equipment and patents, along with considering liabilities. When all of this has been balanced out, funds may be left over. These funds are considered “goodwill,” reflecting the premium a company paid for the acquisition. The goodwill value is recorded along with the market value to accurately account for the entire purchase price.

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The process of acquisition accounting can take time. Usually, a team of accountants is involved, going over the accounts of the acquired company, looking at the fair market value of comparable assets, and so forth. They prepare a detailed report showing the methods they used and the sums they arrived at in order to accurately distribute the value of the newly acquired company in the financial records of the parent company. If there are disputes, the accounting can be challenged.

Shareholders or other people who suspect that acquisition accounting is not being carried out properly can request a review by government regulators if a company is being publicly traded. These regulators will inspect the financial records to determine if the accountants used acceptable standards and practices in their work. If they did not, investigators will determine whether this is an innocent error, or evidence of fraud, such as attempting to inflate the value of assets to make a company look like a better buy.

Some accountants specialize in mergers and acquisitions and have extensive experience with topics like acquisition accounting. They may be hired as consultants in such cases to make sure the accounting is done properly the first time by someone who is familiar with all the rules and regulations. Once the work is done, the accountant's contract ends and work with another company can be sought.

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