Acquisition Accounting

http://www.accountingtools.com/acquisition-accounting

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You should use the acquisition method to account for a business combination.  Specifically, follow these steps:

1. Identify the acquirer. This is the entity that gains control of the acquiree. 
2. Determine the acquisition date. This is when the acquirer gains control of the acquiree, which is usually the deal closing date, but which could be another date if so stated in the purchase agreement. 
3. Recognize and measure any non-controlling interest in the acquiree. Measure this non-controlling interest at its fair value, or using other valuation techniques. 
4. Recognize and measure either goodwill or the gain from a bargain purchase.
5. Recognize and measure identifiable assets acquired and liabilities assumed. These must be part of the business combination transaction, rather than from separate transactions. Measure these assets and liabilities at their fair values as of the acquisition date. This recognition should include the identification of identifiable intangible assets. More specifically:

+ Consideration paid, measured at fair value on the acquisition date

+ Non-controlling interests in the acquiree

+ Fair value of acquirer’s previously-held equity interest in the acquiree

- Net of identifiable assets and liabilities acquired

= Goodwill

A bargain purchase occurs when the above calculation yields a negative goodwill amount. When this occurs, first review the goodwill calculation to ensure that all items were included.  If they were, then recognize the gain resulting from the bargain purchase in profit or loss as of the acquisition date.
For example, Wilson Ross, a publicly-held consulting firm, acquires Finnegan Beagle, which is also a publicly-held consulting firm. The price to buy Finnegan is $7 million. Wilson identifies assets at Finnegan having a fair value of $8 million, intangible assets with a value of $1 million, as well as $2 million of liabilities and $500,000 of contingent liabilities. Wilson also owned an existing stake in Finnegan that has a fair value on the acquisition date of $3 million. Wilson calculates the goodwill associated with the business combination as follows:

+ Purchase price	$7,000,000
+ Liabilities	2,000,000
+ Contingent liabilities	500,000
+ Existing stake in Finnegan	3,000,000
- Assets	(8,000,000)
- Intangible assets	(1,000,000)
= Goodwill	$3,500,000