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More Issues in Purchase Accounting

In: Financial Analysis of Mergers and Acquisitions

Author

Listed:
  • Eli Amir

    (Tel Aviv University)

  • Marco Ghitti

    (SKEMA Business School)

Abstract

This chapter discusses additional issues related to the application of the purchase (acquisition) method of accounting. To determine the fair value of net assets acquired, the acquirer must identify, measure, and recognize provisions that exist at the time of acquisition. We discuss the effect of these provisions on the consolidation process and on subsequent income. We also discuss acquisitions in which the acquirer achieves control in multiple steps. For example, an acquirer may first acquire 25% of the voting shares of a target company in the first step, and only later achieve control by acquiring an additional 40% of the voting shares. In addition, we present the accounting process in cases of complete and partial disposal of subsidiaries. In particular, we focus on when disposal of subsidiaries results in the recognition of gains/losses in the income statement and when disposals are recorded as transactions among equity holders. Finally, we explain and demonstrate the preparation of the consolidated cash flow statement in the presence of acquisitions.

Suggested Citation

  • Eli Amir & Marco Ghitti, 2020. "More Issues in Purchase Accounting," Springer Books, in: Financial Analysis of Mergers and Acquisitions, chapter 0, pages 51-73, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-61769-1_3
    DOI: 10.1007/978-3-030-61769-1_3
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