Business Glossary

accounting method used in a business merger whereby the purchasing company treats the acquired company as an investment and adds the acquired company's assets to its own at their fair market value. Any premium paid over and above the fair market value of the acquired assets is reflected as goodwill on the buyer's balance sheet . Financial Accounting Standards Board (FASB) statements effective June 30, 2001 required that the purchase method of accounting be used for all business combinations (eliminating tax-free pooling-of-interests mergers) and that goodwill, previously amortizable under IRS rules, be subject to an impairment only accounting approach.

accounting method that adds the revalued assets and liabilities of an acquired firm to those of the acquirer. The assets and liabilities of the acquired organization are recorded on the books of the acquirer at fair market value . The difference between the purchase price and the net fair market value of assets and liabilities acquired or assumed is carried by the acquirer as goodwill . The financial figures of the two entities remain combined going forward, but historical costs are restated. This method ordinarily is used when more than 10% of the purchase price is paid with cash, preferred stock, or debt securities.