# What is acquisition accounting?

In merger and acquisition, to acquire the records of the events under acquisition method consists of the following steps −

## Measure of tangible assets and liabilities

Acquirer measures tangible assets and liabilities at market fair value on acquisition date (date at which he gains control). Some assets like lease, insurance contracts etc. are measured on inception date. Third party firms will do the valuation or fair market analysis.

## Measure of intangible assets and liabilities

It is a more difficult task than measuring tangible assets and liabilities because acquirers don’t have any record of most of the items in the balance sheet. If they were recorded, as part of transactions they are amortized over their definite economic lives.

If the asset life was indefinite, first, they determine the economic life and then are amortized.

## Measure of non-controlling interests

Non-controlling interests are measured and recorded in acquisition at its fair value on date of acquisition. Fair value is derived from the market price.

Calculated amount is deducted from per share then paid by an acquirer to buy the business. There is no control premium associated.

## Measure consideration paid

Considerations paid to the seller includes cash, debt, stock, contingent earn out and other types of asset. Fair value is measured on the date of acquisition irrespective of consideration paid.

## Formula to calculate

The formula for consideration paid in acquisition accounting is as follows −

Consideration paid = (Asset paid to seller)fv + (acquirer equity awards)fv – (liabilities incurred by seller)fv

Here, fv means fair value of.

Measure of goodwill − The formula to calculate the goodwill is as follows −

Goodwill = CP + NCI – IAA + IIA

Here,

• CP = Consideration paid

• NCI = Non- controlling interest

• IAA = Identifiable Asset Acquired

• IIA = Identifiable Liabilities Acquired

Updated on: 17-May-2022

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