GR-1001 - SAP Group Reporting - Purchase Method

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The Purchase Method, also known as the Acquisition Method, is used to account for business combinations. It requires the acquirer to record the acquired assets, liabilities, and any non-controlling interest at their fair values on the acquisition date.

Key Principles

• Fair Value Measurement: All assets and liabilities are recorded at their fair values on the acquisition date.
• Goodwill Recognition: Any excess of the purchase price over the fair value of net assets is recognized as goodwill. If the purchase price is less than the fair value of net assets, a gain on bargain purchase is recognized.
• Non-Controlling Interest: The fair value of any non-controlling interest in the acquiree is recognized separately.
• Consolidation: The acquirer consolidates the subsidiary's financials into its own.

Example

Company A acquires 80% of Company B for $500,000. Company B's net assets have a fair value of $550,000. The non-controlling interest is valued at $125,000.

Calculations

• Total Acquisition Value: $500,000 (80% stake) + $125,000 (20% non-controlling interest) = $625,000
• Goodwill: $625,000 (Total Acquisition Value) - $550,000 (Fair Value of Net Assets) = $75,000

Journal Entries

• Acquisition:
  • Debit: Assets (various) $550,000
  • Credit: Liabilities (various) $0 (assumed for simplicity)
• Non-Controlling Interest:
  • Debit: Non-controlling Interest $125,000
• Goodwill:
  • Debit: Goodwill $75,000
• Cash Payment:
  • Credit: Cash $500,000

Post-Acquisition

Goodwill is assessed for impairment, accounting policies are aligned, and profits are allocated between the parent and non-controlling interest.

Impact

The Purchase Method provides a more accurate view of the parent company's financial position by reflecting the acquisition at fair value.