The acquisition method is a cornerstone of accounting for business combinations. Understanding its intricacies is crucial for success on the CPA exam, particularly in the Financial Accounting and Reporting (FAR) section. This module will break down the acquisition method, its components, and how to apply it.

The acquisition method is the accounting standard for recording business combinations. It requires the acquirer to recognize the assets acquired and liabilities assumed at their fair values on the acquisition date. Any excess of the purchase price over the fair value of net identifiable assets acquired is recognized as goodwill.

Several critical elements must be identified and accounted for when applying the acquisition method:

This is the entity that obtains control of the acquiree. Control is typically presumed when the acquirer obtains more than 50% of the voting rights, but it can also be established through other means, such as the ability to direct the relevant activities of the acquiree.

The acquisition date is the date on which the acquirer obtains control of the acquiree. This is the date on which the fair values of assets and liabilities are measured.

All identifiable assets acquired and liabilities assumed must be recognized at their fair values on the acquisition date. This includes tangible assets (like property, plant, and equipment) and intangible assets (like patents, trademarks, and customer lists). Liabilities assumed can include debt, accounts payable, and contingent liabilities.

The consideration transferred by the acquirer is measured at its fair value on the acquisition date. This can include cash, equity instruments, contingent consideration, and other forms of payment. Contingent consideration is recognized at fair value and subsequently remeasured, with changes impacting earnings or equity.

Goodwill arises when the consideration transferred plus the fair value of any non-controlling interest and the fair value of any previously held equity interest in the acquiree exceeds the net of the identifiable assets acquired and liabilities assumed. If the net fair value of identifiable assets acquired and liabilities assumed exceeds the consideration transferred, a gain from a bargain purchase is recognized immediately in earnings.

Goodwill is an intangible asset that represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. It is not amortized but is tested for impairment at least annually. If the carrying amount of goodwill exceeds its recoverable amount, an impairment loss is recognized.

Contingent consideration is an obligation of the acquirer to transfer additional consideration to the acquiree's former owners upon the occurrence or non-occurrence of specified future events. It is recognized at fair value on the acquisition date. Subsequent changes in the fair value of contingent consideration that are due to factors other than the passage of time are recognized in profit or loss (or other comprehensive income, depending on the nature of the item).

A bargain purchase occurs when the acquirer obtains control of an acquiree for consideration that is less than the net of the acquisition-date fair values of the identifiable assets acquired and the liabilities assumed. In such cases, the acquirer recognizes a gain equal to the difference in profit or loss on the acquisition date. Before recognizing such a gain, the acquirer must reassess whether it has correctly identified all assets acquired and liabilities assumed and ensure that the measurement of the consideration transferred and the identifiable net assets is appropriate.

When tackling acquisition method problems on the CPA exam, follow these steps:

1. Identify the acquirer and the acquisition date.
2. Calculate the total consideration transferred (including cash, stock at fair value, and contingent consideration at fair value).
3. Determine the fair value of all identifiable assets acquired and liabilities assumed. This often involves adjustments to the acquiree's book values.
4. Calculate goodwill: Consideration Transferred + Non-controlling Interest (if any) + Previously Held Equity Interest (if any) - Fair Value of Net Identifiable Assets.
5. If the net fair value of identifiable assets exceeds consideration, calculate the bargain purchase gain.
6. Pay close attention to the accounting for contingent consideration and its subsequent remeasurement.