Mergers and Acquisitions

Chapter 10. Purchase Accounting

General Principles of Purchase Accounting

Purchase accounting is now governed by Financial Accounting Standards Board (FASB) Statement 141, Business Combinations, and FASB Statement 142, Goodwill and Other Intangible Assets. These statements supersede Accounting Principles Board (APB) Opinion 16, Business Combinations, and Opinion 17, Intangible Assets. Many requirements of Opinions 16 and 17 are carried forward, but there are some significant differences under the new rules.

Both Statement 141 and Opinion 16 identify the acquiring company as the one that distributes cash or other assets or incurs liabilities. Issuers of equity interests to effect the combination are generally the acquirers, but both pronouncements recognize that a smaller company may issue the equity interests and may assume the name of the acquired entity. This is referred to as a reverse acquisition, and the acquirer is really the larger company. In such cases, relative voting rights after the combination must be considered in identifying the acquirer.

In identifying the acquiring entity, Statement 141 adds to the consideration of existing voting rights the existence of any unusual or special voting arrangements and options, warrants, or convertible securities. These were not addressed as a consideration in Opinion 16. Statement 141 also addresses the existence of large minority interests where there are no other significant voting interests, ability to appoint the governing body, ...