Accounting Treatment

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Accounting treatment (USGAAP) A company can acquire another company in two ways: By purchasing the net assets. By purchasing the common stock of another company. Regardless of the method of acquisition direct costs, costs of issuing securities and indirect costs are treated: Direct costs: the acquiring company capitalizes direct costs paid to outside parties as part of the total acquisition cost. Costs of issuing securities: these costs reduce the issuing price of the stock. Indirect and general costs: the acquiring company expenses these costs as they are incurred. 1.Purchase of Net Assets 1.Treatment to the acquiring company: When purchasing the net assets the acquiring company records in its books the receipt of the…show more content…
To account for this type of investment, the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser. Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets. Purchase differentials have two components: The difference between the fair market value of the underlying assets and their book value. Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets. Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold. 3. More than 50% ownership — subsidiary When the amount of stock purchased is 50% of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect
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