Acquisition Method vs Purchase Method
Acquisition method and purchase method are accounting processes which are almost the same in every aspect. The principles for both acquisition method and purchase method are the same. One can hardly come across any difference between the two.
Acquisition method, the first to come into force, was the standard form of accounting. Purchase method came later and is used for a merger or acquisition.
In the acquisition method, there are two methods of accounting — acquisition accounting and merger accounting. The acquisition has to be valued at fair value. Moreover, the difference between purchase price and fair value has to be recognised as goodwill.
Purchase method also has certain features similar to those of merger accounting. This method helps in having a uniform mode of accounting for expenditures related with purchase.
One of the main differences noted between purchase method and acquisition method is that the former one has a more discretionary purchase- price allocation mode. On the other hand, the acquisition method has a more market-driven recognition mode.
In the acquisition method, the business combinations are reflected at full fair value, which is not seen in a purchase method. The acquisition method also includes non-controlling interests and contingencies, which may not be seen in the purchase method. The acquisition method is seen to generate more faithful representation of intangible assets, which means the financial statements are more transparent and have more relevance.
With the purchase method, the company that makes the purchase only regards the other company as an investment. Here, the amount paid for the purchase could be higher than the fair market value. This is the same with acquisition method, where a company buys another for expanding its own business.
Summary
1. Acquisition method, the first to come into force, was the standard form of accounting. Purchase method came later and is used for a merger or acquisition.
2. In the acquisition method, there are two methods of accounting — acquisition accounting and merger accounting. The acquisition has to be valued at fair value. Moreover, the difference between purchase price and fair value has to be recognised as goodwill.
3. Purchase method helps in having a uniform mode of accounting for expenditures related with purchase.
4. The purchase method has a more discretionary purchase- price allocation mode. On the other hand, the acquisition method has a more market-driven recognition mode.
5. In the acquisition method, the business combinations are reflected at full fair value.