Meaning

The cost of acquisition is the amount that is needed to acquire a firm or unit from a company. It can reflect the amount paid for fixed assets. It also reflects the cost incurred by the business for getting a customer.

Beyond the payment for the asset, there are further costs associated with the acquisition cost. For example, if the company buys land for manufacturing, the company has to incur legal fees, registration fees, and so on.

We will discuss acquisition costs in relation to acquiring business or part of it.

Potential business acquisition

The computation of potential business is based on estimate valuation. The evaluator looks at all facts and financial data and concludes the valuation taking into the consequences of future events as well.

Further down the road is about succession planning, preliminary negotiations, and situations involving important issues that are subject to financial constraints. The computation of these aspects is more complicated than mere estimation.

Then, comprehensive analysis of valuation is made for companies tussling with legal cases. The valuator analyzed the case one by one and also values the patent, trademark, market conditions, forecasting of data along with appropriate discount rates.

The basic acquisition cost is dependent on the following:

  • Future outlook
  • Future cash flow
  • Capital assets
  • Business Value Determination
  • Asset-based which is the book value

Liquidation value of the company depicts that if the company liquidates the assets and pays off all liabilities, what will be apportioned to stockholders.

Acquisition cost on grounds of future cash flows or earnings.

This is very apt concept than mere basic acquisition cost. This takes into account the potential cash flow of the business.

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There are many techniques to compute value of business as:

  1. Capitalization of average net earnings: This is value connected to future earnings resulting from the business acquisition. The assumption is that there will be synergy benefits resulting in higher earnings in the future.
  2. Discounting of anticipated future cash flows: Businesses now days instead prefer using average cash flows instead of earnings. This is computed by computing most likely potential inflows and reducing them on the date of valuation.
  3. Determination of net assets: This is basically the computation of net worth with some modifications. This is mainly for sectors that are related to assets instead of operations.

The other computations also include calculation of customer acquisition costs when new franchise is bought or news business is entered upon.  

IFRS on acquisition costs

IAS 32 on Financial instruments and presentation and IAS 39 on financial instruments deal with the issue of debt issuing costs and equity instruments. The costs that are associated with acquisition costs must be expensed.

It may include reimbursements to acquiree for incurring some of the acquisition costs. The costs which need to be expensed include advisory fees, legal fees, accounting fees, similar consulting fees, cost of maintaining the acquisition department, and so on.