M&A: Accounting for Takeovers

The purchase method is the method used to account for takeovers and mergers. This makes fair value adjustment to items on the takeover target's balance sheet. The difference between the purchase price and the fair value of the target's net assets is known as goodwill created on acquisition. Here we look at the key features of the purchase method, how goodwill arises on acquisition, how minority interests are accounted for, and criticisms of the purchase method.