What is the Difference Between Purchase and Acquisition (Method of Accounting)?
🆚 Go to Comparative Table 🆚The main difference between the purchase and acquisition methods of accounting lies in how they treat the assets, liabilities, and goodwill of an acquired company. Here are the key differences between the two methods:
- Treatment of Goodwill: Under the purchase method, the difference between the acquired company's fair value and its purchase price is recorded as negative goodwill (NGW) on the balance sheet and amortized over time. In contrast, with the acquisition method, NGW is immediately treated as a gain on the income statement.
- Focus on Fair Value: Acquisition accounting, also known as fair market value accounting, focuses on the prevailing market values in a transaction, including contingencies and non-monetary items that were not accounted for under the purchase method.
- Bargain Acquisitions: How bargain acquisitions are treated also differs between the two methods. Under the purchase method, the difference between the acquired company's fair value and its purchase price is recorded as NGW. With the acquisition method, NGW is immediately treated as a gain on the income statement.
- Contingencies and Non-controlling Interests: Acquisition accounting includes accounting for contingencies and non-controlling interests, whereas the purchase method does not.
- Financial Statement Impact: The purchase method records the assets of the acquired company as assets of the acquirer at their fair market value, treating the target firm as an investment. In contrast, the acquisition method views the purchase as the whole firm, not just the sum of its parts, resulting in a more integrated financial statement presentation.
In summary, the acquisition method is more focused on fair market values, includes contingencies and non-controlling interests, and treats bargain acquisitions differently from the purchase method. The purchase method, on the other hand, records the assets of the acquired company as assets of the acquirer and treats the target firm as an investment.
Comparative Table: Purchase vs Acquisition (Method of Accounting)
The main differences between the purchase and acquisition methods of accounting are as follows:
| Feature | Purchase Method | Acquisition Method |
|---|---|---|
| Treatment of the Acquired Company | Treated as an investment by the acquirer | Valued at fair value, with the difference between purchase price and fair value recognized as goodwill |
| Allocation of Assets and Liabilities | Assets and liabilities of the target company are added to the balance sheet of the acquirer at a price that reflects their fair market value | Goodwill is recorded when the purchase price is higher than the sum of the fair value of the net assets acquired |
| Fair Value Analysis | Not required | Required, often conducted by a third-party valuation specialist |
| Treatment of Bargain Acquisitions | The difference between the acquired company's fair value and its purchase price is recorded as a gain on the income statement | No gain is recorded on the income statement |
| Contingencies and Non-Controlling Interests | Not accounted for | Accounted for |
In summary, the purchase method treats the acquired company as an investment, while the acquisition method values the company at fair value and recognizes goodwill. The acquisition method also accounts for contingencies and non-controlling interests, which are not considered in the purchase method.
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