What is purchase accounting for merger or acquisition?



Either two or more companies merge or a company acquires another. In either of the processes, one company purchases another company asset for the union of their business. Accounts are maintained for these transactions.

Accounting for merger and acquisition transactions

Identification of business combination− To achieve some synergy form.

Identification of acquirer − Governs financial and operating policies of combined business entities.

  • Entity having greater fair value, likely to be an acquirer.

  • Management who are dominating in deals, likely to be an acquirer.

  • Entities who are giving up cash/other assets, likely to be acquirers.

Cost of transaction measured − Fair values (at the time of acquisition) + equity instruments + direct cost (attributes to business).

Attributable cost includes the following −

  • Fees paid to accountants.
  • Fees paid to legal advisers.
  • Fees paid to valuators/consultants.

Allocation of cost of combined business− Acquirer allocates cost of business (assets, liabilities, contingent liabilities of acquiree), which satisfies the criteria.

  • In assets, other than the intangible assets, which have future economic benefits will go to the acquirer.

  • In liabilities, other than the contingent liabilities, which have embodying economic benefits will be required to settle an obligation and its fair value is measured reliably.

  • For intangible assets and contingent liabilities, their fair value can be measured reliably.

Intangible assets (Acquiree’s) are as follows −

  • Identified separately.
  • Resources controlled by entities.
  • Probable source for future economic benefits.
  • Fair value measured reliably.

Intangible assets that are separately recognized are mentioned below −

  • Customer base

  • Patented technology

  • Trade names

  • Licenses/ing

  • Non-compete agreements

  • Account for goodwill− Identified intangible asset is recognized as goodwill in the acquirer’s balance sheet.


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