Acquisition

Definition

Acquisition refers to the process of obtaining or gaining possession of an asset, particularly in the context of intangible assets. It involves the purchase or acquisition of a resource that provides future economic benefits to the acquiring entity.

5 Must Know Facts For Your Next Test

1. Acquisition of intangible assets can be through a separate purchase or as part of a business combination.
2. The cost of an acquired intangible asset includes the purchase price and any directly attributable costs of preparing the asset for its intended use.
3. Intangible assets acquired in a business combination are recognized separately from goodwill if they meet the definition of an intangible asset and their fair values can be measured reliably.
4. Goodwill is recognized as the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination.
5. Intangible assets with finite useful lives are amortized over their estimated useful lives, while intangible assets with indefinite useful lives are not amortized but are tested for impairment annually.

Review Questions

• Explain the process of acquiring intangible assets and how the cost of the asset is determined.
  • Intangible assets can be acquired through a separate purchase or as part of a business combination. The cost of an acquired intangible asset includes the purchase price and any directly attributable costs of preparing the asset for its intended use. In a business combination, intangible assets are recognized separately from goodwill if they meet the definition of an intangible asset and their fair values can be measured reliably. The fair value of the intangible asset is used as the basis for determining its cost, which is then amortized over the asset's estimated useful life.
• Describe the accounting treatment for goodwill acquired in a business combination.
  • Goodwill is recognized as the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. Goodwill is considered an intangible asset with an indefinite useful life and is not amortized. Instead, it is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the fair value of the reporting unit to which the goodwill is allocated is less than its carrying value, an impairment loss is recognized for the difference, up to the amount of the recorded goodwill.
• Analyze the differences in accounting treatment between intangible assets with finite useful lives and those with indefinite useful lives.
  • Intangible assets with finite useful lives, such as patents or licenses, are amortized over their estimated useful lives. The amortization expense is recognized in the income statement, reducing the carrying value of the asset over time. In contrast, intangible assets with indefinite useful lives, such as goodwill, are not amortized. Instead, they are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the fair value of the asset is less than its carrying value, an impairment loss is recognized, reducing the asset's carrying value to its fair value.

Related terms

Intangible Asset: An intangible asset is a non-physical asset that has long-term value and provides future economic benefits, such as patents, copyrights, trademarks, or goodwill.

Fair Value:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Goodwill:

Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination.