Definition of purchase (ACCOUNTING) method

manner of accounting for a business combination. Under the purchase method, the acquiring corporation records the net assets acquired at the fair market value of the consideration given. Any excess of the purchase price over the fair market value of the net identifiable assets is recorded as goodwill. The acquiring corporation then records periodic charges to income for the depreciation of the excess price over book value of net identifiable assets. Goodwill is subject to an annual impairment test. Note that goodwill already on the books of the acquired company is not brought forth. Net income of the acquired company is brought forth from the acquisition date to year-end. Direct costs of the purchase reduce the fair value of securities issued. Indirect costs are expensed.