The acquisition method
All business combinations use the acquisition method: identify the acquirer, determine the acquisition date, measure identifiable assets acquired and liabilities assumed at fair value, and recognize goodwill (or a bargain purchase gain).
Goodwill calculation
Goodwill = Consideration transferred + Fair value of any noncontrolling interest − Fair value of identifiable net assets acquired
EXAMPLE: Acquirer pays $900,000 cash for 100% of Target. Target's identifiable net assets have a fair value of $750,000. Goodwill = $900,000 − $750,000 = $150,000.
If the calculation is negative (fair value of net assets acquired exceeds consideration paid), it's a bargain purchase, and the acquirer recognizes a gain in earnings immediately — after re-verifying the measurements first.
Noncontrolling interest (NCI)
When the acquirer buys less than 100%, the noncontrolling interest is measured at fair value (not just the proportionate share of net assets) and presented within consolidated equity, but separately from the parent's equity.
EXAMPLE: Acquirer buys 80% of Target for $720,000. NCI fair value (for the remaining 20%) is independently estimated at $180,000. Target's identifiable net assets have fair value $750,000. Goodwill = ($720,000 + $180,000) − $750,000 = $150,000.
Acquisition-related costs
Legal, accounting, and advisory fees related to the acquisition are expensed as incurred — they are not included in the purchase price or capitalized as part of goodwill. Debt/equity issuance costs follow their own separate rules (not expensed the same way).
EXAM TIP: Watch for the difference between the parent-only "cost" method used pre-consolidation and the full fair-value remeasurement required at the consolidated level — intercompany balances and profits are eliminated in consolidation.