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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
She further said to allow equal opportunities and array misconception, the Offer to Purchase method is a new approach which has been tested previously by the City and has its objective mechanisms to ensure that prices are not artificially inflated.
One important reason is that prior to July 1, 2001 business combinations were accounted for using one of two methods: the pooling-of-interests method or the purchase method. Under these accounting choices, similar business combinations could be accounted for by using different methods that produced significantly different financial statement results.
Among their most significant provisions are mandatory use of the purchase method of accounting (and the consequent ban of the pooling method) for business combinations within the ED's scope and prohibition of amortization of goodwill or intangible assets with indefinite useful lives.
* All business combinations within the scope of Exposure Draft 3 be accounted for using the purchase method. The pooling-of-interests method would be prohibited.
SFAS 141 supersedes APB 16, Business Combinations, and SFAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and specifies how to account for a business combination using the purchase method. Business combinations encompass all combinations involving two or more parties, regardless of whether the enterprises are incorporated or unincorporated.
Statement 141 requires all business combinations initiated after June 30 to be accounted for using the purchase method of accounting; Statement 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for a goodwill impairment test.
Statement 141 will significantly improve the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method--the purchase method. Use of the pooling-of-interests method is no longer permitted.
* The statement requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method.
The purchase method (popular worldwide) and pooling of interests method are the two methods used for recording business combinations.
Under APB Opinion 16, the purchase method and the pooling of interests method are both acceptable in accounting for business combinations, although they are not alternatives in accounting for a given combination.