To record an acquisition journal entry, debit each acquired asset at its acquisition-date fair value, credit each assumed liability and each form of consideration paid at fair value, and let the difference fall into goodwill (or, less commonly, a bargain purchase gain). The entry must balance in one line-up: assets and goodwill on the debit side; liabilities, cash, stock issued, debt issued, and any contingent consideration on the credit side. Everything upstream of that entry, the valuations, the allocations, the tax effects, exists to give you the right numbers to post.
The framework is ASC 805, and it is the only permitted method under U.S. GAAP for a business combination. The pooling-of-interests approach is gone.
What Goes on the Credit Side: Consideration Transferred
Consideration transferred is the total fair value of everything the acquirer gives up to obtain control, measured on the acquisition date rather than on the date cash moves.
- Cash is recorded at the amount paid.
- Equity instruments are valued at the market price of the acquirer’s shares on the closing date. One million shares trading at $20 is $20 million of consideration.
- Debt instruments are recorded at fair value, which can diverge from face value depending on market rates at closing.
- Contingent consideration, typically an earn-out tied to post-close performance, is recorded at estimated fair value on the acquisition date, usually through probability-weighted scenarios or option pricing.1Deloitte Accounting Research Tool. Deloitte’s Roadmap Business Combinations – 5.7 Contingent Consideration
Contingent consideration classified as a liability doesn’t stop at closing. When you remeasure it later, the change runs through the income statement. An earn-out originally booked at $5 million and later remeasured to $6 million produces a $1 million loss in the current period.2KPMG. Contingent Consideration Accounting and Business Considerations
What Goes on the Debit Side: Purchase Price Allocation
Purchase Price Allocation restates every acquired asset and assumed liability to acquisition-date fair value, regardless of what the target’s books showed. Equipment carried at heavily depreciated historical cost gets marked up. Customer relationships that never appeared on the target’s balance sheet get recognized. Assumed obligations that the target didn’t book, such as an unfavorable lease or pending litigation, come onto the acquirer’s books.
Tangible Assets
Property, equipment, and inventory are revalued to current fair values, typically through independent appraisal. The new basis, not the target’s historical cost, drives future depreciation.
Identifiable Intangibles
An intangible must be recognized separately from goodwill if it arises from contractual or legal rights (patents, licenses, non-compete covenants) or if it can be separated and sold, transferred, or licensed on its own (customer lists, trade names, developed technology).3Deloitte Accounting Research Tool. Deloitte DART – 4.10 Intangible Assets Valuation usually follows an income approach: project the future cash flows the asset will generate, discount to present value. Customer relationships, for instance, are often valued from expected revenue and margin from those specific customers across their anticipated retention period.
Assumed Liabilities
Liabilities come on at fair value too. That covers obvious items like outstanding debt and payables, and less visible ones like unfavorable lease terms, warranty reserves, litigation exposure, and environmental cleanup obligations. Fair value for a liability generally reflects what a third party would charge to assume it.
Deferred Taxes from the Allocation
Restating book values without restating tax bases creates temporary differences. Where the new fair value exceeds tax basis, you record a deferred tax liability at the enacted rate; where tax basis exceeds fair value, a deferred tax asset. Those deferred tax amounts become part of the net identifiable assets, and because they sit inside the allocation, they feed directly into the goodwill number.
Goodwill: The Plug That Balances the Entry
Once the allocation is done, the entry is arithmetic. Goodwill is whatever it takes to make debits equal credits:
Goodwill = Consideration Transferred − Fair Value of Net Identifiable Assets Acquired
Net identifiable assets means fair value of identifiable assets minus fair value of assumed liabilities.4Deloitte Accounting Research Tool. 5.1 Measuring Goodwill The residual captures assembled workforce, expected synergies, strategic positioning, and other value drivers that can’t be sold on their own.
A Worked Example
Assume the acquirer pays $100 million in cash and issues $70 million in stock. Total consideration is $170 million. The PPA determines identifiable assets at $200 million fair value and assumed liabilities at $40 million fair value, so net identifiable assets are $160 million. Goodwill is $10 million.
| Account | Debit | Credit |
|---|---|---|
| Identifiable Assets | $200,000,000 | |
| Goodwill | $10,000,000 | |
| Liabilities Assumed | $40,000,000 | |
| Cash | $100,000,000 | |
| Common Stock / APIC | $70,000,000 | |
| Total | $210,000,000 | $210,000,000 |
When the Math Runs the Other Way: Bargain Purchase
If consideration transferred is less than the fair value of net identifiable assets, there is no goodwill. Before booking anything, ASC 805 requires you to reassess whether every acquired asset and assumed liability was correctly identified and measured, because a bargain purchase is unusual enough that it often signals a measurement error rather than a windfall.5Deloitte Accounting Research Tool. 5.2 Measuring a Bargain Purchase If the reassessment holds up, the gain is recognized immediately in earnings on the acquisition date. Consideration of $150 million against $160 million of net identifiable assets produces a $10 million gain on the income statement, credited in place of goodwill.4Deloitte Accounting Research Tool. 5.1 Measuring Goodwill
Adjusting the Entry for Less-Than-100% Deals
Noncontrolling Interest
When the acquirer gets control without buying all of the equity, the remaining stake is a noncontrolling interest, and the formula expands:
Goodwill = (Consideration Transferred + Fair Value of NCI) − Fair Value of Net Identifiable Assets
Under U.S. GAAP, the NCI is measured at acquisition-date fair value and included in the goodwill calculation, so the goodwill figure reflects the whole business rather than just the acquirer’s share.4Deloitte Accounting Research Tool. 5.1 Measuring Goodwill In the entry, the NCI shows up as a separate equity credit on the consolidated balance sheet. Acquire 80% for $136 million with a 20% NCI valued at $34 million and the total on the credit side effectively reaches $170 million: cash or stock for the $136 million, plus an NCI line for $34 million.
Step Acquisitions
If the acquirer already held a minority equity interest in the target before gaining control, ASC 805 treats the deal as a business combination achieved in stages. The previously held interest is remeasured to fair value on the acquisition date, and any gain or loss is recognized in earnings.6Deloitte Accounting Research Tool. 6.5 Business Combinations Achieved in Stages The full formula becomes:
Goodwill = (New Consideration Transferred + Fair Value of Previously Held Interest + Fair Value of NCI, if any) − Fair Value of Net Identifiable Assets
A 30% stake carried at $25 million with an acquisition-date fair value of $33 million produces an $8 million gain in earnings, and $33 million goes into the goodwill calculation alongside the new consideration paid for the remaining interest.
Costs That Don’t Belong in the Entry
Fees paid to investment bankers, lawyers, accountants, and due diligence consultants to close the deal are not part of consideration transferred and do not affect goodwill. ASC 805 requires the acquirer to expense them as incurred.7Deloitte Accounting Research Tool. 5.4 Acquisition-Related Costs The bookkeeping is a debit to an expense account, often called Acquisition Expense or M&A Transaction Costs, and a credit to Cash or Accounts Payable. Advisory fees of $500,000 hit the income statement in full.
One important exception: costs to issue debt or equity securities as part of the deal follow different rules. Stock issuance costs are netted against equity proceeds (reducing additional paid-in capital). Debt issuance costs are treated as a discount on the debt and amortized over its life. Confusing them with advisory fees will misstate both equity and earnings.
When the Numbers Are Still Provisional
Appraisals, intangible valuations, and tax analyses often aren’t finished by closing, so the initial entry may rely on provisional amounts. ASC 805 provides a measurement period for corrections, running from the acquisition date until the acquirer has the information it needs or determines the information isn’t available. The outer limit is one year from the acquisition date.8Deloitte Accounting Research Tool. 6.1 Measurement Period
Adjustments during this window must reflect new information about facts that existed on the acquisition date. Learn later that a piece of equipment was worth $2 million less than the provisional estimate and you reduce the asset and increase goodwill by that amount. Events that happened after closing are ordinary post-acquisition transactions and don’t qualify.
Since ASU 2015-16, these adjustments are recognized in the period they are determined rather than restated back to the acquisition date. You also book, in current-period earnings, the cumulative effect on depreciation, amortization, or other income items that would have been different had the revised numbers been in place from the start. In practice, that’s a catch-up entry to depreciation or amortization alongside the balance sheet correction.
What Happens to the Balances After Closing
Amortizing Finite-Lived Intangibles
Identifiable intangibles with finite useful lives, such as customer relationships, patents, and developed technology, are amortized over their best-estimated useful lives. Each period, debit Amortization Expense and credit either the intangible account directly or an Accumulated Amortization contra account. A $20 million customer list amortized straight-line over 10 years is $2 million a year.9Deloitte Accounting Research Tool. 4.3 Intangible Assets Subject to Amortization Indefinite-lived intangibles, such as some trade names, are not amortized but are tested for impairment.
Goodwill Impairment
Goodwill is not amortized under current U.S. GAAP for public companies. It is tested for impairment at least annually, or whenever a triggering event indicates its value may have declined. The test compares the fair value of the reporting unit that holds the goodwill to that unit’s carrying amount, including the goodwill; if carrying amount exceeds fair value, the difference is an impairment loss, capped at the goodwill allocated to the unit.10Deloitte Accounting Research Tool. 2.4 Quantitative Assessment (Step 1) The entry debits Impairment Loss and credits Goodwill directly. Once written down, goodwill cannot be written back up.