Final answer:
The acquisition method in accounting requires using fair value to recognize and measure the identifiable assets, liabilities, and any non-controlling interest in a business combination.
Step-by-step explanation:
Applying the acquisition method involves using fair value to recognize and measure the assets acquired, liabilities assumed, and any non-controlling interest in the company being acquired. In a business combination, it is required to assess the fair value of these items as of the acquisition date. This approach is based on the principle that transactions should be recorded at their true economic value rather than their book value.To illustrate, let's consider Company A acquiring Company B. Under the acquisition method:
- Identify the acquirer and the acquisition date.
- Measure the fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.
- Recognize and measure goodwill or a gain from a bargain purchase, if applicable.
The fair value adjustments may involve revaluing tangible assets like land and buildings, as well as intangible assets like patents, trademarks, and customer relationships to their current market values.