Difference between acquisition method and purchase method
acquisition method vs purchase method:
While the terms acquisition method and purchase method stand on common grounds as two methods of accounting, the differences between these two terms are indicated clearly by the terms themselves. Therefore, this article seeks to elaborate more on these two methods which will then lead to a discussion of their differences as suited.
What is acquisition method?
Regarded as the first of all accounting methods, the acquisition method is known as the standard form of accounting. It consists of two parts such as, acquisition accounting and merger accounting. Acquisition method is more of a market-driven recognition mode and includes non-controlling interests and contingencies as well.
What is purchase method?
Purchase method is defined as an accounting method which is specifically related to mergers and acquisitions. This method came later on after the acquisition method and bears some similarity to the merger accounting which forms a part of the acquisition method. Since the future losses would be treated as part of the acquisition cost in the purchase method, this method prevents a company from creating a provision for the restructuring of the acquisition that will create such future losses. Here, while the acquiring company and its fair value are listed, any difference between the price paid for an acquisition and the fair value is treated as goodwill.
What is the difference between the acquisition method and the purchase method?
While both acquisition method and purchase method are accounting methods which are quite similar to one another, the acquisition method remains as the first method that was ever introduced and remains so as the standard form of accounting. Also while the purchase method processes more discretion regarding purchase and price allocation mode, the acquisition mode is seen to be having more of a market-driven recognition mode. Moreover, the acquisition method is regarded as the more faithful representation of intangible assets which in turn increases their transparency which again results in an increased relevance of the financial statements in a general context more than in the case of the purchase method.
Also while the business combinations are reflected at full fair value in the acquisition method, it is not shown so in the purchase method. And while the other company is viewed as an investment by the company that makes the purchase and the amount that has been paid for that particular purchase would usually be higher than the fair market value in both the methods, the acquisition method carries non-controlling interests and contingencies which cannot be seen in the purchase method.