Acquisition Method: Business Combinations | CPA Exam FAR.

In this video, we explain acquisition method in business combinations.
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Business combinations occur when one company acquires control over another, resulting in the consolidation of financial statements. The acquisition method is the required approach under accounting standards such as IFRS 3 and ASC 805 for recording such transactions. This method ensures that the acquiring company appropriately recognizes and measures the acquired assets, liabilities, and any non-controlling interest.
Key Steps in the Acquisition Method
Identification of the Acquirer
The acquiring entity is identified based on which party obtains control over the other.
Control is typically defined as having more than 50% of voting rights or significant influence over financial and operational decisions.
Determination of the Acquisition Date
The acquisition date is when the acquirer gains control, usually the closing date of the transaction.
It determines when the assets and liabilities of the acquired entity should be recognized.
Recognition and Measurement of Identifiable Assets and Liabilities
The acquirer must recognize all identifiable assets acquired and liabilities assumed at their fair value on the acquisition date.
This includes tangible assets, intangible assets (such as trademarks and patents), and contingent liabilities.
Recognition of Goodwill or Bargain Purchase
Goodwill is recognized when the purchase price exceeds the fair value of the net identifiable assets.
Bargain purchase occurs when the acquisition price is lower than the net fair value, resulting in a gain recognized in the income statement.
Measurement of Consideration Transferred
The acquirer measures the total consideration transferred at fair value, including:
Cash paid
Equity instruments issued
Contingent consideration (if applicable)
Accounting for Non-Controlling Interest (NCI)
NCI represents ownership interests not held by the acquirer.
It is measured either at fair value or at the proportionate share of the acquiree’s net assets.
Consideration in Acquisition Method
Cash Payments: Direct cash transfer for acquiring the business.
Equity Instruments: Shares issued to the acquiree’s shareholders.
Contingent Consideration: Future payments contingent on performance benchmarks, which must be fair valued and reassessed periodically.
Accounting Treatment Under the Acquisition Method
Balance Sheet Impact
Acquired assets and liabilities are recorded at fair value.
Goodwill is recorded separately as an intangible asset.
Income Statement Impact
Acquisition-related costs (e.g., legal, advisory, and due diligence costs) are expensed as incurred.
Post-acquisition earnings of the acquiree are consolidated into the acquirer’s financial statements.
Cash Flow Impact
Cash paid is recorded as an investing activity.
Any contingent consideration payments made post-acquisition impact cash flows.
Challenges in Applying the Acquisition Method
Fair Value Determination:
Estimating the fair value of intangible assets such as customer relationships and brand value can be complex.
Contingent Liabilities:
Identifying and measuring obligations that arise from the acquisition process.
Integration Issues:
Merging financial reporting systems and internal controls across the combined entity.
Advantages of the Acquisition Method
Provides a clear and comprehensive view of the combined entity’s financial position.
Enhances comparability across companies and industries.
Ensures recognition of all assets and liabilities at fair value, improving transparency.
Conclusion
The acquisition method provides a standardized approach to accounting for business combinations, ensuring transparency and consistency in financial reporting. By recognizing all acquired assets and liabilities at fair value and properly accounting for goodwill and consideration, this method helps stakeholders assess the true impact of acquisitions on financial performance.
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[@AverySeale-s6b]

Is there a journal entry the acquirer is required to make for the NCI portion? I am studying for BAR and the CPA blueprint says (in relation to business combination, not consolidation).. "Prepare JEs to record the identifiable net assets acquired in a business combination that includes a noncontrolling interest.'

[@AccountingLectures]

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