Acquisition Accounting: Definition, How It Works, and Key Requirements

What is acquisition accounting?

Acquisition accounting (also called business combination accounting) is the set of accounting rules that govern how a purchaser reports the assets, liabilities, non-controlling interest (NCI) and goodwill of an acquired company on its consolidated statement of financial position. The acquirer must allocate the fair market value (FMV) of the purchase to the identifiable tangible and intangible assets and liabilities; any excess of purchase price over that allocation is recorded as goodwill.

Key takeaways

• All business combinations are treated as acquisitions for accounting purposes; an acquirer and an acquiree must be identified even if a new entity is formed.
• Assets, liabilities, non-controlling interest and consideration transferred are measured at fair value on the acquisition date.
• Goodwill equals the purchase price less the fair value of identifiable net assets; a bargain purchase (negative goodwill) is recognized immediately as a gain.
• Fair value analyses are commonly performed by third‑party valuation specialists.

How acquisition accounting works

Standards (IFRS/IAS and guidance from other major standard‑setters) require that, at the acquisition date, the acquirer measure and recognize the following at fair value:

• Tangible assets and liabilities — physical items such as property, plant and equipment, and inventory.
• Intangible assets and liabilities — nonphysical items such as patents, trademarks, customer relationships and assumed contractual arrangements.
• Non‑controlling interest (NCI) — the portion of equity in the acquiree not held by the acquirer; if practicable, NCI can be measured using the acquiree’s market price.
• Consideration transferred — the total price paid by the acquirer, which may include cash, shares and contingent consideration (e.g., earnouts). Contingent consideration is measured at fair value and changes may be remeasured or recognized depending on the accounting framework.
• Goodwill or gain on bargain purchase — if consideration exceeds the fair value of identifiable net assets, the excess is recorded as goodwill. If consideration is less, the difference is recognized immediately as a gain.

History and rationale

The modern acquisition accounting approach replaced earlier purchase‑method practices to emphasize fair value measurement and improve transparency. It broadened the scope of recognized items (including contingencies and NCI) and changed how bargain purchases are treated (recognized as gains rather than amortized negative goodwill).

Practical complexities and challenges

Applying acquisition accounting can be complex and time‑consuming because many items must be remeasured to fair value and separately recognized where previously aggregated. Typical challenges include:

• Valuing intangible assets, contingent liabilities and contingent consideration.
• Assessing and measuring fair value for inventory, contracts, hedges and tax‑related items.
• Determining the appropriate measurement of NCI.
• Integrating accounting systems and reconciling pre‑acquisition balances, often delaying deal closing and post‑closing adjustments.

Because of these challenges, acquirers frequently engage valuation specialists and legal/financial advisers to support due diligence, fair value measurement and disclosure.

Conclusion

Acquisition accounting requires identifying the acquirer, measuring identifiable assets and liabilities and NCI at fair value, recognizing consideration transferred, and recording goodwill or a bargain gain. The approach enhances transparency but introduces significant valuation and integration work that must be planned for during deal execution.