Accounting is a practice that includes many different calculation methods and important figures vital to the success of any business. Because there are more ways than one to calculate the finances of an entity, accountants are given choices as to which method is best in a given situation. The acquisition method and purchase method of accounting are two such calculation methods, each of which provides a formidable accounting technique.
The acquisition method of accounting takes into account two forms of accounting -- acquisition accounting and merger accounting. In this form, any acquisition by a company, whether it be in terms of brick-and-mortar or monetary assets, must be accounted for at fair value. A fair value is defined as a rational estimate of an asset's current worth. In this method, the difference between the purchase price and the fair value price needs to be accounted for in the "goodwill" section of the balance sheet.
The purchase method is slightly different. Under the purchase method, a company cannot create a restructuring provision to put off any losses associated with an acquisition until another accounting period. Under the purchase method, any costs associated with a new acquisition are reported right away, thus not enabling a company to spread the loss out to make a period seem more profitable than it really was.
Although the two methods are very similar, there are some key differences. The purchase method is considered more accurate in terms of accounting for the impact of acquiring an asset because it requires a company to report any losses associated with that acquisition immediately whereas the acquisition method allows for a bit of "creative" accounting in that any "rational and reasonable" estimate of an asset's worth can be included in the company's financials.
Although both of these methods are readily acceptable accounting practices, accountants themselves are typically very aware of which method is the best to make a company look its best once the financial statements are released. While the purchase method may make immediate financials seem a bit worse than you'd like, it also puts a company in the best long-term financial position in that it is not limiting future financial periods.
- Accounting Principles, 7th Edition; J. Weygandt; 2004