What is the difference between acquisition method and purchase method

Under the purchase method, the acquirer assigns values to acquired assets and liabilities based on the cost of the acquisition. If the acquirer makes the purchase at a bargain price, the buyer must mark down the values of assets and liabilities so the total does not exceed the purchase price. Unfortunately, this often results in balance sheet values that differ from fair value.

FASB put this right in Statement R by requiring the acquirer to use fair values for all acquired assets and liabilities. A contingent asset or liability is one that a company may recognize based on future events. The purchase method requires no acknowledgment of contingencies arising from a merger or acquisition.

In contrast, the acquisition method obliges the acquirer to recognize contingencies, whether contractual or otherwise, at fair value.

The fair value is the best estimate of the contingency as of the acquisition date. When new information becomes available, the acquirer may raise the value of the contingent liabilities and lower the value of contingent assets. In presenting the financials of the merger, the acquisition method includes the contingencies and non-controlling interests which are excluded in the purchase method.

Direct costs incurred in the combination process are captured and reported as costs for the acquired company in the purchase method while in the acquisition method such costs are expensed by the acquiring company in the year of combination.

In the purchase method, the earnings of the acquired company are only included to those of the acquiring firm from the date of acquisition whereas the acquisition method advocates for the inclusion of these earnings for the full year of combination.

Depreciation or amortization for excess of book over market values is present in the purchase method but absent in the acquisition method since no excess costs exist above the book values. Save my name, email, and website in this browser for the next time I comment. In the acquisition method, the business combinations are reflected at full fair value.

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