Difference Between Acquisition and Purchase Method

Acquisition and Purchase are two calculation methods in accounting, which allow businesses to record and analyze their finances. While the two methods work more or less in similar ways, differences exist in how these finances are eventually accounted for in the preparation of financial statements.

The acquisition method has long been present and could be termed as the traditional way of accounting. It has a market driven recognition mode where an acquisition of an asset is recorded at the fair market value. The Purchase method may record any purchase at the fair market value (not compulsory) but companies need to report any losses right away, and are restricted from spreading the gains over a period of time.

The Acquisition method also incorporates non-controlling interests and contingencies, giving the financial statement a more transparent look. Moreover, for recording intangible assets, this method gives more or less an ideal representation of the company’s situation with regards to acquiring that asset. Any deviation from the purchase price and the fair market price will be recorded as goodwill.

The Purchase method usually comes into play during mergers or acquisitions, where the company making purchases sees the other firm as an investment. It is much more in-demand, especially in the United States and Europe, as it is regulated by International Reporting Standards.

Instructions

  • 1

    Acquisition Method

    Acquisition method of accounting  can be described as a set of formal guidelines on how the assets, liabilities and non-controlling interests will be recorded in the financial statements of a target company. Essentially there are two forms of accounting – acquisition accounting and merger accounting. According to this method, all proceeds will be recorded at the fair market value, which is simply the current worth of an asset. Any gains will be accounted as goodwill in the targeted company’s balance sheet.

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    Purchase Accounting

    This method is an extension of the acquisition method, where all losses or gains must be recorded immediately after a purchase has been accounted for. A company cannot extend or restructure any losses to any another accounting period. This method has now been made mandatory in all EU countries, along with US, in order to prevent any abuse of provisions. A company therefore, will disregard any impact of goodwill.

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