An acquisition closes on one day. The accounting takes months. The acquirer records every identifiable asset and liability at acquisition-date fair value, computes goodwill as what is left, expenses the deal costs, and may revise provisional amounts for up to a year. This guide walks one acquisition through each step with entries, then sets out what the auditor tests. The wider framework is in ASC 805 for private companies, and earn-outs have their own treatment. The example uses illustrative round numbers and ignores income taxes, which are an exception to the fair value principle under ASC 805 as PwC explains.
How are the acquired assets and liabilities measured?
At acquisition-date fair value, with listed exceptions. PwC states that the acquirer recognizes the identifiable assets acquired and liabilities assumed separately from goodwill, and measures them at fair value as defined in ASC 820, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. The exceptions include income taxes, employee benefits, contingencies and leases. The acquirer's intended use of an asset does not change its fair value, and separate valuation allowances are not recorded for nonfinancial assets measured at fair value.
Intangible assets are recognized apart from goodwill if they meet the contractual-legal criterion or the separability criterion, per PwC. Trade names, patented technology, customer contracts and licenses are typical. An assembled workforce is not recognized separately, and PwC says any value attributable to it is included in goodwill. Private companies can elect not to recognize certain customer-related intangibles and noncompetition agreements separately, folding them into goodwill; PwC and Schneider Downs both describe that election, which PwC says also requires the goodwill amortization alternative.
How is goodwill calculated?
Goodwill is the excess of the consideration transferred, plus the fair value of any noncontrolling interest, plus the fair value of any previously held equity interest, over the net acquisition-date amount of the identifiable assets acquired and liabilities assumed. PwC cites ASC 805-30-30-1 for that formula. Consideration is generally measured at fair value.
If the net identifiable assets exceed the total of consideration, noncontrolling interest and previously held interest, the result is a bargain purchase. PwC says the acquirer first reassesses whether all assets and liabilities were identified and measured properly. Only if the bargain remains is a gain recognized, and no goodwill is recorded.
Worked acquisition entry
Illustration only. On July 1, a company acquires 100% of a business for $9,000,000 in cash. Acquisition-date fair values:
| Item | Fair value |
|---|---|
| Accounts receivable | $1,200,000 |
| Inventory | $1,500,000 |
| Property and equipment | $3,000,000 |
| Customer relationships | $2,000,000 |
| Trade name | $600,000 |
| Accounts payable | ($900,000) |
| Debt assumed | ($1,500,000) |
| Net identifiable assets | $5,900,000 |
Goodwill: $9,000,000 minus $5,900,000 equals $3,100,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $1,200,000 | |
| Inventory | $1,500,000 | |
| Property and equipment | $3,000,000 | |
| Customer relationships | $2,000,000 | |
| Trade name | $600,000 | |
| Goodwill | $3,100,000 | |
| Accounts payable | $900,000 | |
| Debt assumed | $1,500,000 | |
| Cash | $9,000,000 |
Are deal costs part of the price?
No. Acquisition-related costs are not part of consideration transferred. Schneider Downs states that costs such as advisory, legal and valuation fees are expensed as incurred when the services are received, and that costs to issue debt or equity follow other applicable GAAP. Crowe also lists acquisition-related costs among items accounted for outside the business combination.
Illustration only. The acquirer pays $250,000 in legal and advisory fees.
| Account | Debit | Credit |
|---|---|---|
| Acquisition-related expense | $250,000 | |
| Cash | $250,000 |
Adding that $250,000 to goodwill would overstate the asset.
What is the measurement period?
A window to finish the accounting. PwC states that it cannot exceed one year from the acquisition date and ends earlier once the acquirer receives the information it needs about acquisition-date facts. Provisional amounts reported at year end can change during it, but only for information about facts and circumstances that existed at the acquisition date. Events after the date, such as a customer lost in the next quarter, are not measurement period adjustments.
Since ASU 2015-16, adjustments are recognized in the reporting period in which the amount is determined, not retrospectively (ASC 805-10-25-17 per PwC, and the ASU text). Adjustments to identifiable assets and liabilities are offset against goodwill. The effect on depreciation or amortization is recognized in current-period earnings. After the period ends, PwC says the accounting is revised only to correct an error, under ASC 250.
Illustration only. On November 15, the final appraisal values property and equipment at $2,800,000, not $3,000,000, based on conditions at July 1.
| Account | Debit | Credit |
|---|---|---|
| Goodwill | $200,000 | |
| Property and equipment | $200,000 |
Goodwill becomes $3,300,000. The lower depreciation base reduces depreciation going forward. Depreciation already booked on the original value is adjusted in the period of the change, not by restating prior periods.
Audit angle
The allocation is a set of fair value estimates made by management, often with a valuation firm, so the audit file needs evidence on both the inputs and the process. See auditing accounting estimates, using the work of a specialist and fair value measurement.
- Acquirer and date. Read the purchase agreement and closing documents to establish who obtained control and when. The date drives every fair value.
- Consideration. Agree cash paid to bank records and the closing statement. Test any non-cash or deferred consideration.
- Completeness of intangibles. Compare the identified intangibles to the contracts, customer base, trademarks and technology the target had. A goodwill-heavy allocation with no customer or trade name intangible needs an explanation, unless the private company election applies.
- Valuation inputs. For each material intangible, test the forecast, attrition and royalty or discount assumptions against target history and industry data. Evaluate the specialist's competence and the method.
- Tangible assets and liabilities. Test receivables, inventory and fixed asset fair values against appraisals and aging. Look for liabilities assumed that were not recorded.
- Goodwill arithmetic. Recompute goodwill from consideration and net identifiable assets.
- Deal costs. Trace fees to invoices and check that they are expensed, not capitalized.
- Measurement period. Check each adjustment relates to acquisition-date facts, is recorded in the period determined and does not hide an error or a post-acquisition event.
Common misstatements: deal costs in goodwill, missing intangibles, fair values anchored to the purchase price, post-closing events booked as measurement period adjustments, and no assessment of whether a bargain purchase was real.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- PwC, Business combinations guide, 2.5 Recognizing and measuring assets and liabilities: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_2_acquisitio_US/25_recognizing_and_m_US.html
- PwC, Business combinations guide, 2.6 Goodwill, bargain purchase and consideration: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_2_acquisitio_US/26_recognizing_and_m_US.html
- PwC, Business combinations guide, 2.9 Measurement period: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_2_acquisitio_US/29_measurement_perio_US.html
- PwC, Business combinations guide, 4.3 Types of identifiable intangible assets: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_4_intangible_US/43_types_of_identifi_US.html
- PwC, Business combinations guide, 4.7 Private company alternative: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_4_intangible_US/47_private_company_a_US.html
- Schneider Downs, Considerations in acquisition accounting: https://schneiderdowns.com/our-thoughts-on/considerations-acquisition-accounting/
- KPMG, Handbook: Business combinations (acquisition-related costs expensed, private company alternative): https://kpmg.com/us/en/frv/reference-library/2026/handbook-business-combinations.html
- FASB, Accounting Standards Update 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination (private company election requires the goodwill amortization alternative): https://storage.fasb.org/ASU%202014-18.pdf
- Crowe, Consideration or Compensation? Applying ASC 805: https://www.crowe.com/insights/take-into-account/consideration-or-compensation-applying-asc-805
- FASB, Accounting Standards Update 2015-16, Simplifying the Accounting for Measurement-Period Adjustments: https://storage.fasb.org/ASU%202015-16.pdf
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