Purchase Accounting
Acquisition accounting that records acquired assets and liabilities at fair value, recognizing goodwill for any excess price.
What is Purchase Accounting?
Purchase accounting, governed by ASC 805, requires companies to record the assets and liabilities of an acquired entity at their fair values on the acquisition date. Any excess of the purchase price over the net fair value of identifiable assets is recorded as goodwill. This method replaced the former pooling-of-interests approach and is now required for virtually all business combinations under US GAAP.
Example
When Microsoft acquired Activision Blizzard for $68.7 billion in 2023, it allocated the purchase price to identifiable assets — game franchises, technology, and net working capital — at fair value, with the remaining excess recorded as goodwill on its balance sheet.