Purchase method of accounting

Topics: Balance sheet, Goodwill, Generally Accepted Accounting Principles Pages: 5 (997 words) Published: September 14, 2014
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 combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that doesn’t constitute a business are not combinations. The IFRS establishes principles for recognizing and measuring the identifiable assets acquired, the liabilities assumed and non controlling interest in the acquire. Any classifications and designations made in recognizing these items must be made in accordance with the contractual terms ,economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date Each identifiable asset liability is measured at its acquisition date fair value. All other components of non controlling interests shall be measured at their acquisition date fair value, unless another measurement basis is required by IFRS. The IFRS provides some limited exception to these recognition and measurement principles: Leases and Insurance contracts are required to be classified on the basis of the contractual terms. Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognized. Some assets and liabilities are required to be recognized or measured in accordance with IFRS, rather than at fair value. There are special requirements for measuring a required right. Disclosure:

The IFRS requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combination that occurred during the current reporting period. The Differences between the Acquisition Method & the Purchase Method The purchase method and the acquisition method are both accounting practices intended to help provide an accurate record of this process. Understanding the differences...
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