Mergers and Acquisitions Accounting:
A Practical Guide

Mergers and acquisitions accounting is the process of recording, valuing, and reporting financial transactions when one company acquires or merges with another—following the acquisition method under ASC 805 (GAAP) or IFRS 3 to ensure accurate financial statements, fair value measurement of assets and liabilities, and proper goodwill recognition.

Over the past two decades of working with companies navigating M&A deals, I’ve seen one consistent pattern: the accounting side of a merger or acquisition is often an afterthought. Executives focus on deal structure and negotiation, then scramble when it’s time to reconcile two balance sheets and allocate a multi-million-dollar purchase price. The stakes are high—get it wrong, and you’ll face SEC restatements, audit delays, and investor confidence issues. In this article, I’ll walk you through exactly how M&A accounting works, the key steps to follow, and the common pitfalls to avoid so your post-closing integration runs smoothly.

What is mergers and acquisitions accounting and how do you get it right?

• M&A accounting uses the acquisition method to value assets, liabilities, and goodwill when companies combine
• The acquirer must restate the target’s balance sheet to fair value within 12 months of closing
• Proper accounting ensures transparent reporting, investor confidence, and regulatory compliance
• Fair value measurement determines goodwill or bargain purchase gain amounts
• Following ASC 805 guidance and GAAP standards prevents costly restatements

Why M&A Accounting Matters More Than Ever

In 2025, global M&A deal value reached approximately $3.0 trillion, representing a 31% increase compared to 2024. When trillions of dollars change hands through complex transactions, the accounting treatment isn’t just a compliance exercise—it’s the foundation for investor trust and operational success.

You might think accounting comes after the “real work” of negotiating and closing a deal. That mindset creates disasters. I’ve watched companies announce billion-dollar acquisitions, only to restate earnings months later because they mishandled purchase price allocation or failed to identify contingent liabilities. These mistakes don’t just hurt credibility; they trigger shareholder lawsuits, SEC investigations, and management turnover.

The good news? M&A accounting follows a systematic process. Master the fundamentals—from determining the acquirer to measuring fair values to testing goodwill—and you’ll navigate even complex transactions with confidence.

Determining the Acquirer and Deal Structure: Your First Critical Decision

Understanding whether your transaction qualifies as a business combination or an asset acquisition determines the entire accounting treatment. Most buyers overlook this decision, but it fundamentally shapes how you’ll record and report the deal.

Business combination vs. asset acquisition

The distinction matters because business combinations use the acquisition method, while asset acquisitions follow a different approach. Under ASC 805, you apply a two-step screen: first, check if substantially all value concentrates in a single asset. If not, evaluate whether the acquired set includes an input and substantive process that create outputs—if yes, it’s a business combination.

Think of it this way: buying a single patent or piece of real estate? Probably an asset acquisition. Buying an operating division with employees, customer contracts, and production capabilities? That’s a business combination requiring full purchase accounting treatment.

Identifying the true acquirer

The acquirer is the entity obtaining control—typically holding more than 50% voting rights post-close. But control isn’t always obvious. In mergers of equals or reverse acquisitions, determining the acquirer requires analyzing multiple factors:

• Who appoints the majority of board members?
• Which management team runs the combined entity?
• Who issued equity versus who received cash?
• Which entity is significantly larger by assets, revenue, or market cap?

This matters because only the acquirer revalues the target’s assets to fair value. The acquirer’s own assets stay at historical cost. Get this wrong, and your entire consolidation unravels.

When structuring these complex transactions, understanding merger accounting standards and finance strategies helps align your deal structure with proper accounting treatment from day one.

Purchase Price Allocation: The Heart of M&A Accounting

This is where M&A accounting transforms from theory to practice. Purchase price allocation (PPA) requires splitting the total consideration paid among all acquired assets and assumed liabilities at fair value. Any remainder becomes goodwill (or rarely, a bargain purchase gain).

Breaking down the PPA process

First, calculate total purchase consideration. This includes cash paid, fair value of stock issued, contingent earnouts, and any liabilities assumed. Don’t forget transaction costs—they’re expensed, not capitalized into the purchase price.

Second, identify every acquired asset. The obvious ones appear on the balance sheet: inventory, equipment, real estate. But the valuable assets often hide off-balance-sheet: customer relationships, developed technology, trade names, non-compete agreements. According to recent studies, intangible assets and goodwill represent 80-90% of purchase price in many sectors.

Third, value each asset at fair value. This isn’t book value or replacement cost—it’s the price a market participant would pay. You’ll need valuation specialists using income, market, or cost approaches depending on the asset type.

Finally, record goodwill as the residual. After assigning fair values to all identifiable assets and liabilities, the remaining purchase price becomes goodwill. This represents expected synergies, workforce value, and future growth potential that can’t be separately identified.

Need clean M&A accounting? Complete Controller can help.

Fair Value Measurement: Where Deals Succeed or Fail

Fair value sits at the center of acquisition accounting. ASC 820 defines it as the exit price in an orderly transaction between market participants. Sounds simple, but measuring fair value for unique intangibles challenges even experienced teams.

The measurement hierarchy helps prioritize reliable inputs:

• Level 1: Quoted prices for identical assets (rare in M&A)
• Level 2: Observable market data for similar assets
• Level 3: Unobservable inputs requiring significant judgment

Most acquired intangibles fall into Level 3, creating valuation uncertainty. Customer relationships might use discounted cash flows from expected renewals. Technology assets might use replacement cost adjusted for obsolescence. These judgments matter—aggressive valuations create future impairment risk.

Understanding fair value measurement under ASC 820 provides the foundation for defensible valuations that withstand auditor and regulator scrutiny.

Accounting for Goodwill and Testing for Impairment

Goodwill represents the premium paid above the fair value of net assets acquired. Unlike other assets, goodwill doesn’t amortize. Instead, you test it annually (or more frequently if indicators suggest impairment).

Here’s the sobering reality: research tracking 893 large acquisitions found that 65% of at-risk acquisitions experienced goodwill impairment within two years. Before 2001’s accounting changes, goodwill represented only 3-7% of company assets. Today? It’s ballooned to 11-15%, partly due to aggressive valuations and partly reflecting our knowledge economy.

The impairment testing process

Start by allocating goodwill to reporting units—typically operating segments that benefit from the acquisition’s synergies. Each year, compare the reporting unit’s fair value to its carrying amount (including goodwill). If fair value drops below carrying amount, you’ve got potential impairment.

The impairment loss equals the excess of carrying amount over fair value, recorded directly in operating income. No smoothing, no amortization—just a sudden earnings hit that often triggers stock price declines.

Learning from Kraft Heinz’s $15.4 billion mistake

In 2019, Kraft Heinz announced a staggering $15.4 billion goodwill impairment—one of the largest in corporate history. The 2015 merger initially recorded substantial goodwill for iconic brands like Oscar Mayer and Heinz. But aggressive cost-cutting damaged brand equity and supplier relationships, causing fair values to plummet.

The impairment triggered a $12.6 billion quarterly loss and wiped out $36 billion in market cap. The lesson? Conservative assumptions during purchase price allocation create a margin of safety. Aggressive valuations create ticking time bombs.

Navigating Contingent Consideration and Earnouts

Many deals include contingent consideration—additional payments tied to future performance metrics. These earnouts align buyer and seller interests but complicate accounting.

Initially, you record contingent consideration at fair value as part of purchase price. But here’s the twist: if classified as a liability (most common), you must remeasure it each quarter. Performance exceeding targets increases the liability and creates a loss. Missing targets decreases the liability and creates a gain.

This quarterly volatility surprises boards and investors. One quarter you’re celebrating strong performance, the next you’re recording losses because that performance triggered higher earnout payments. Clear disclosure and proactive communication prevent confusion.

Measurement Period Adjustments: Getting It Right Eventually

ASC 805 provides a measurement period up to one year post-closing to adjust your initial PPA based on new information about facts existing at acquisition date. This isn’t a mulligan for bad estimates—it’s recognition that complete information rarely exists on day one.

Common measurement period adjustments include:

• Finalizing inventory valuations after physical counts
• Completing customer contract reviews revealing different terms
• Discovering pre-acquisition tax liabilities or legal claims
• Receiving final appraisals for real estate or equipment

Document everything. The SEC expects detailed workpapers showing initial estimates, new information discovered, and final adjustments. Create clear timelines demonstrating why adjustments relate to acquisition-date facts, not post-close developments.

For public companies managing these complex reconciliations, establishing robust financial reporting for mergers and acquisitions processes ensures accurate consolidated statements throughout the measurement period.

Consolidation and Financial Reporting Post-Acquisition

Once the deal closes, you begin preparing consolidated financial statements combining the acquirer’s and target’s operations. But consolidation isn’t just adding two sets of books together—it requires careful elimination of intercompany transactions and alignment of accounting policies.

On closing date, eliminate the target’s equity accounts (replaced by your PPA), record assets and liabilities at fair value, and recognize goodwill. Going forward, amortize identifiable intangibles over their useful lives—typically 5-20 years depending on asset type. Customer relationships might amortize over expected retention periods while trade names could be indefinite-lived.

Watch for intercompany transactions that inflate consolidated results. Sales between entities, intercompany loans, and management fees all require elimination. Miss these, and you’ll overstate revenues and profits.

The purchase price allocation close under ASC 805 guidance requires disciplined processes to track adjustments, eliminations, and fair value amortization accurately.

Tax Implications: Where Book and Tax Diverge

M&A accounting for book purposes rarely matches tax treatment, creating complexity and opportunity.

When you step up assets to fair value for book purposes, they typically retain historical tax basis. This creates deferred tax liabilities—future tax obligations when higher book depreciation exceeds lower tax depreciation. A $100 million asset stepped up to $120 million generates approximately $4.2 million in deferred tax liability at current federal rates.

If the target brings net operating losses (NOLs), you might offset future taxable income—but Section 382 limitations often apply when ownership changes exceed 50%. These rules can severely restrict NOL usage, turning apparent tax assets into stranded value.

For structuring purposes, IRC Section 1060 governs tax purchase price allocation, requiring specific ordering: cash and deposits first, then marketable securities, then other assets by class. This tax allocation often differs significantly from book PPA.

Disclosure Requirements: Transparency Builds Trust

Public companies face extensive disclosure requirements under ASC 805 and SEC regulations. Done right, these disclosures demonstrate competence and build investor confidence. Done poorly, they invite scrutiny and restatement risk.

Required disclosures include:

• Pro forma results showing combined revenues and earnings as if the acquisition occurred at period start
• Detailed purchase price allocation with fair values by major asset class
• Description of goodwill factors and expected deductibility
• Contingent consideration terms and fair value assumptions
• Material one-time costs and ongoing integration expenses

For material acquisitions exceeding 40% significance tests, financial reporting for mergers and Rule 3-05 significance tests require audited financial statements of the acquired business—a costly requirement that catches many buyers off-guard.

The AI Revolution in M&A Valuation

The M&A landscape is evolving rapidly. In 2025, over 50% of global venture capital flowed to AI companies, with strategic buyers paying billions for AI capabilities. These deals challenge traditional valuation approaches—how do you value algorithmic IP, training data, or compute infrastructure?

AI assets often lack comparable market transactions or predictable cash flows, pushing them into Level 3 fair value territory. Valuation specialists now grapple with quantifying network effects, data moats, and model performance metrics. Expect continued evolution as ASC 805 guidance adapts to these emerging asset classes.

Conclusion: Excellence in M&A Accounting Drives Deal Success

Mergers and acquisitions accounting might seem like back-office compliance work, but it’s actually the foundation of successful deals. From that first decision about acquirer determination through years of goodwill impairment testing, the accounting choices you make shape financial results and investor perceptions.

The companies that excel at M&A—think of Dell’s successful EMC integration versus Kraft Heinz’s goodwill disaster—share common traits. They invest in robust valuation processes. They document assumptions thoroughly. They communicate transparently with stakeholders. Most importantly, they treat acquisition accounting as a strategic discipline, not an afterthought.

Remember, with $3 trillion in global M&A activity, the stakes for getting this right have never been higher. Whether you’re acquiring your first competitor or orchestrating a transformational merger, following disciplined M&A accounting practices protects value and enables growth.

Ready to ensure your next acquisition follows best practices from LOI through integration? Visit Complete Controller for expert guidance from the team that pioneered cloud-based bookkeeping and controller services. We’ve supported hundreds of companies through successful acquisitions—let us help you navigate your next deal with confidence.

Frequently Asked Questions About Mergers and Acquisitions Accounting

What’s the difference between pooling-of-interests and acquisition accounting?

Pooling-of-interests was eliminated in 2001—today, all business combinations use the acquisition method under ASC 805. The acquisition method requires revaluing the target’s assets to fair value and recognizing goodwill, while the old pooling method simply combined book values without revaluation.

How long do I have to complete the purchase price allocation after closing?

You must record a preliminary PPA at closing, but ASC 805 provides a measurement period up to 12 months to finalize valuations based on information about facts existing at acquisition date. Most companies complete final PPA within 6-9 months.

Can goodwill ever increase after the initial acquisition?

No—goodwill from a specific acquisition is fixed once the measurement period ends. However, impairment can reduce it, and future acquisitions create additional goodwill. Some confuse contingent consideration adjustments with goodwill changes, but earnout payments adjust the liability account, not goodwill.

What happens to the target company’s retained earnings in acquisition accounting?

The target’s retained earnings and all other equity accounts are eliminated in consolidation. They’re effectively replaced by the purchase price allocation—the acquirer records assets, liabilities, and goodwill, not the target’s historical equity. Only the acquirer’s pre-close retained earnings survive.

Do I need independent valuations for purchase price allocation?

While not legally required, most companies hire independent valuation specialists for material acquisitions. Third-party valuations provide audit defense, reduce bias, and demonstrate good faith effort to regulators. For public companies or deals with complex intangibles, independent valuations are essentially mandatory in practice.

Sources

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Jennifer Brazer Founder/CEO

Jennifer is the author of From Cubicle to Cloud and Founder/CEO of Complete Controller, a pioneering financial services firm that helps entrepreneurs break free of traditional constraints and scale their businesses to new heights.

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Brittany McMillen

Brittany McMillen is a seasoned Marketing Manager with a sharp eye for strategy and storytelling. With a background in digital marketing, brand development, and customer engagement, she brings a results-driven mindset to every project. Brittany specializes in crafting compelling content and optimizing user experiences that convert. When she’s not reviewing content, she’s exploring the latest marketing trends or championing small business success.

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