how acquisition accounting works
international financial reporting standards ifrs and international accounting standards ias require all business combinations to be treated as acquisitions for accounting purposes meaning that one company must be identified as an acquirer and one company must be identified as an acquiree even if the transaction creates a new company the acquisition accounting approach requires everything to be measured at fmv the amount a third party would pay on the open market at the time of acquisition the date that the acquirer took control of the target company that includes the following fair value analysis is often conducted by a third party valuation specialist history of acquisition accountingacquisition accounting was introduced in 2008 by the major accounting authorities the financial accounting standards board fasb and the international accounting standards board iasb to replace the previous method known as purchase accounting acquisition accounting was preferred because it strengthened the concept of fair value it focuses on prevailing market values in a transaction and includes contingencies and non controlling interests which were not accounted for under the purchase method another difference between the two techniques is how bargain acquisitions are treated under the purchase method the difference between the acquired company s fair value and its purchase price was recorded as negative goodwill ngw on the balance sheet that was to be amortized over time in contrast with acquisition accounting ngw is immediately treated as a gain on the income statement complexities of acquisition accountingacquisition accounting improved the transparency of mergers and acquisitions m a but did not make the process of combining financial records easier each component of assets and liabilities of the acquired entity has to be adjusted for fair value in items ranging from inventory and contracts to hedging instruments and contingencies to name just a few the amount of work needed to adjust and integrate the books of the two companies is one main reason for the long period between agreement on a deal by the respective boards of directors and the actual deal closing 