In the first part of the series on business combinations, we discussed what business combination is and the types of business combinations. It was also noted in the first series that if an acquisition company’s ownership level is greater than 50% and exercise significant control, the business combination must be accounted for as consolidation. In part 2 of this series, we will look at acquisition method of business combination.
In the current pronouncement of FASB ASC 805, a corporation is required to account for business combination by applying the acquisition method. What, then, is the acquisition method in a business combination?
What is an acquisition method in business combinations?
The acquisition method is based on the 4-step method in the business combination process below:
- Identify the Acquirer
- Determine the Acquisition date
- Recognize and measure identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree.
- Recognize and measure goodwill, or recognize a gain from a bargain purchase.
Now let’s dive into each of the above steps.
Identify the Acquirer
The acquirer is the entity that transfers cash or incurs liabilities or issues its equity interest to acquire the acquiree’s net assets.
Determine the acquisition date
The acquisition date is the date on which the acquirer obtains control of the acquiree. This is construed to be the date on which the acquirer transfers the consideration to the acquiree, obtains acquiree’s net assets and assumes the acquiree’s liabilities.
Recognize and measure identifiable assets acquired, liabilities assumed and noncontrolling interest in the acquiree
On the acquisition date, all identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree are measured at fair value.
Recognize goodwill or recognize gain from a bargain purchase
Goodwill is recognized if the aggregate consideration transferred, plus fair value of previously held equity interest in the acquiree as of the acquisition date, plus fair value of non-controlling interest is greater than fair value of net identifiable assets.
Gain from bargain purchase is recognized if fair value of net identifiable assets is greater than the aggregate consideration transferred, plus fair value of previously held equity interest in the acquiree as of the acquisition date, plus fair value of noncontrolling interest
In the subsequent series, we shall discuss consolidation and consolidation worksheet, intercompany transactions and elimination entries.
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