What are acquisition costs in purchase accounting?

Learn accounting basics about acquisition costs in purchase accounting.

1. Nature of acquisition costs in purchase accounting

The world of business includes such activities as mergers and acquisitions. In a simplified way, this means companies buy other companies. There are also accounting implications related to such purchases, and the accounting area dealing with such transactions is called purchase accounting. One aspect of purchase accounting is acquisition-related (or acquisition) costs. The official definition of acquisition costs according to the generally accepted accounting principles in the USA (US GAAP) is presented below:

Acquisition-related costs are costs the acquirer incurs to effect a business combination.

To expand on this definition, we can add that acquisition costs in purchase accounting are those incurred by a company to prepare for and execute an acquisition of another company (again, simplified definition).

Acquisition costs may include the following:

  • Finder’s fees
  • Advisory fees
  • Legal fees
  • Accounting fees
  • Valuation fees
  • Other consulting fees
  • General administrative costs (e.g., internal mergers and acquisition department)

As of the time of this article publication (2011), according to US GAAP, all acquisition related costs should be expensed when they are incurred and when the services are provided. Note that this is different from the accounting treatment of such costs in the past when acquisition costs were allowed to be capitalized as part of the purchased entity’s cost.

Companies also often incur costs to obtain financing when they buy other companies. Such costs are called debt issuance fees (i.e., costs incurred to register and issue debt securities). These costs are allowed to be capitalized and amortized to expenses over the life of related debt. Because direct costs related to an acquisition (acquisition-related costs) and costs related to debt origination can be commingled (e.g., both types of expenditures may be paid to the same bank), it is important to separate them for accounting purposes.

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