purchase method

Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities' net assets on the balance sheet. Generally, depreciation/amortization will increase for this method (due to the creation of goodwill) compared to the pooling method resulting in lower net income.

Purchase Acquisition

In accounting, a way of recording a merger or acquisition in which the acquiring company treats the target company like an asset such as equipment or stock. That is, in a purchase acquisition, the acquiring company simply adds the fair market value of the target company's assets to its balance sheet. If the acquisition cost more than the fair market value, the excess is recorded as goodwill. Purchase acquisition is less common than pooling-of-interests, because goodwill is recorded against future earnings, reducing the company's profit.

purchase method

A method of accounting for a merger or combination in which one firm is considered to have purchased the assets of the other firm. If the price paid for the acquired firm exceeds the market value of the acquired firm's assets, the difference is recorded as goodwill on the acquiring firm's balance sheet. The goodwill must be written off over a period of years. Compare pooling of interests.
References in periodicals archive ?
The central objective of this paper is to associate and distinguish two different methods of accounting for business combinations: the Acquisition method and the Purchase method.
The controlled purchase method is the most effective method in the investigative work, Alexander Ivanov, Vice Chief of the Interior Ministry's Drug Trafficking Fighting Department, said.
These are: fair value, disclosure framework, consolidations, purchase method procedures and financial instruments and derivatives.
FAS 141 requires the use of the purchase method of accounting for all business combinations and prohibits the pooling of interests method.
In conjunction with its issuance of IFRS 3, the IASB also revised international accounting standards (IAS) 36, Impairment of Assets, and 38, Intangible Assets; together they require, among other things, that all business combinations within the scope of IFRS 3 be accounted for using the purchase method and that the pooling-of-interests method no longer be used.
Results indicate that valuation effects are more favorable for acquisitions using the purchase method in the eleven-day period surrounding the announcement and for at least six months following the announcements.
All business combinations within the scope of FAS 141 are to be accounted for using the purchase method.
The purchase method records the acquired assets and liabilities at fair value and may recognize goodwill.
The purchase method provides investors with the information necessary to determine the true cost of one company buying another and, as a result, provides a basis for consumers to track future returns on the investment.
Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001.
NEW YORK-The Financial Accounting Standards Board's (FASB) recent decision to eliminate the pooling-of-interests method of accounting for business acquisitions and replace it with the purchase method should not impact valuations in the long term, according to analysts.
The purchase method, which would replace pooling, requires a buyer to record the purchase price of the other company.