Purchase method of accounting

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Purchase Method of Accounting
All business combinations must be accounted for by applying the purchase method. This involves 3 key steps:
a) Identifying an acquirer,
b) Measuring the cost of the business combinations and
c) Allocating the cost of the business combination to the identifiable assets and liabilities acquired.
a) Identifying the Acquirer
The acquirer should be identified for all business combinations,
The acquirer is the entity which obtains controls over the other entity,
There are a number of ways in which control can be achieved,
Control is normally assumed where the acquirer obtains more than 50% of the voting rights in the acquiree.
b) Measuring the cost of the business combination.
The cost of a business combination includes the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by acquirer.
Quoted equity investments should be valued at their published price.
Deferred consideration should be measured.
Contingent consideration should be measured..
Costs directly attributable to the combination should be recognized as part of the cost of the combination.
c) Allocating the cost of the business combination
The acquiree’s net identifiable assets, liabilities and contingent liabilities should be recognized at the fair value at the date of acquisition.
When certain criteria are met, the acquiree’s assets, liabilities, contingent liabilities should be recognized separately.
Provisions for future re-organization plans and future losses should not be recognized as liabilities at the acquisition date.
Contingent liabilities which can be measured reliably should be as liabilities at the acquisition date.
An intangible asset can only be recognized if it is separate or arises from contractual or other legal right and can be measured reliably.

Acquisition Method of Accounting:
A business combination must be accounted for by applying the acquisition method, unless it is a

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