Meaning
Transaction accounting process divides the total consideration paid for an acquired business into the fair values of its identifiable assets, liabilities, and goodwill. This purchase price allocation is required under both Chinese Accounting Standards and international guidelines during a business combination. The procedure is bounded by the closing date of the transaction and must be finalized within one year of acquisition.
Asset Identification
Accounting teams must identify intangible assets that were not previously recognized on the acquiree’s balance sheet, such as customer relationships, trademarks, and technology. This phase of purchase price allocation requires a deep dive into the contracts and operational history of the target firm. Unrecorded liabilities, including environmental obligations and outstanding litigation, must also be quantified.
Fair Valuation
Certified appraisal firms are engaged to determine the fair value of the identified assets using income or replacement cost methods. These valuations are subject to scrutiny by external auditors during the annual audit of the acquiring corporation. Accuracy in this step is essential because it directly impacts future depreciation and amortization expenses.
Goodwill Recognition
Residual amount of the purchase price that cannot be allocated to identifiable assets or liabilities is recorded as goodwill on the consolidated balance sheet. Under current accounting standards, this goodwill is not amortized but must be tested for impairment annually. If the cash-generating unit’s value declines, the corporate parent must write down the goodwill, which reduces reported net income.
