Merger and Acquisition Accounting is done by using mainly two methods.
These two methods are the following:
Purchase Method
In this method, the asset and liabilities of the merged company are presented at their market values as on the date of acquisition.This is done in order to ensure that the resulting values of the accounting process are able to reflect the market values. Here, we are talking about the market value which was recorded before the final settlement of the acquisition deal that is the at the time of bargaining.
In this process of Merger and Acquisition Accounting, the total liabilities of the joint company equals the sum of individual liabilities of the two separate firms. In this case, the purchase price determines the amount by which the acquiring firm's equity is going to increase.
But, there are some drawbacks of this Purchase Method. When Merger and Acquisition Accounting is done through this Purchase Method, then there is a chance of over rating the Depreciation Charges. This is because, in Purchase Method, book value of assets are used in accounting, but the book value of assets is generally lower than the fair value if there is inflation in the economy.
