Purchase Method of Accounting
Defining Purchasing Method of Accounting
Acquisition accounting, also popularly known as a purchasing method of accounting was used in the accounting standards. This term is mostly common in terms of acquisitions and mergers. The purchase methods lists the fair value of the acquired company. It's treated as goodwill, when a difference is found between the acquisition price paid and the actual fair value. Possible future losses when restructuring of the acquisition happens through provision creation. Here the losses would be treated as a part of the cost of acquisition. This could also be termed as post acquisition costs.
Purchase vs. the Acquisition Method
Through an acquisition method the combinations of business are through fair value that is not included in the purchase method. It also consists of non-controlling interests and contingencies unlike the purchasing methods. Through an acquisition method intangible assets are represented. Financial statements are more transparent. Through a purchase method, the company is making an investment and the purchase is termed as an investment. The purchase amount paid could be higher than that of the fair market value. Purchasing method is used for acquisition or merger and came later in the stages. Acquisition method was first and a standard form of accounting. Purchase accounting helps in maintaining a uniform accounting procedure for expenses in the purchase. Purchase methods are more of a discretionary purchase, where as acquisition is more of a market-driven recognition purchase.
Purchasing Method Standards and Application
The purchasing method is applicable is countries like the United States, and the Europe. Wherever there is IFRS or International Financial Reporting Standards, purchasing methods must be initiated. Through this method one must identify the acquiring party. The purchasing methods help in improving the accounts. But the investors might not consider the impact of goodwill for this. Eliminating provisions are more important and useful to prevent visibility and abuse. Here are some application procedures:
- Identification of acquiring the company.
- Determining date of acquisition reports.
- Determining acquired entity cost.
- Valuing paid the consideration or net acquired assets.
- Direct cost accounting.
- Contingent consideration accounting.
- Identifying total number of assets and and liabilities.
- Finding the cost of the acquired entity through assets and liabilities.