Accounting for Asset Purchase vs. Stock Purchase

How a takeover happens can make a big difference in accounting.

Dec 12, 2015 at 11:33PM

Mergers and acquisitions are an important way that growing companies get bigger, and structuring a deal in the best interests of both the acquirer and the target is critical to getting a transaction done. In particular, the accounting treatment for an asset-purchase acquisition can differ greatly from that for a stock purchase, and that can have a big impact on the future financial results of the combined entity.

Key differences between asset-purchase and stock-purchase transactions
Companies can effectively merge in two different ways. An asset purchase involves the acquirer buying some or all of the assets of the target company, with the proceeds paid to the target company itself. Asset purchases are useful when an acquirer only wants to buy part of the target's overall business, but they're also used to shield the acquirer from taking on any potential liabilities of the target company.

Stock purchases involve the complete acquisition of the target company's shares, with the acquirer going directly to shareholders to consummate the deal. Once complete, the target company can continue to exist as a distinct legal entity even though it often becomes a corporate subsidiary of the acquiring company. However, the new parent company can be vulnerable to existing or even unforeseen liabilities of the target company in a stock purchase.

Accounting for asset purchases vs. stock purchases
An asset purchase has different tax and accounting characteristics from a stock purchase. With an asset purchase, the seller must realize capital gains or loss on the assets sold. The buyer gets a corresponding tax benefit in the form of a stepped-up tax basis for the assets purchased, allowing the buyer to take larger amounts of depreciation allowances in the future than would otherwise be possible.

In a stock purchase, the buyer doesn't get to reset the tax basis of the assets within the target corporation, forcing it to continue to use the target's existing depreciation schedule. That usually leads to a smaller tax write-off for depreciation, making it less desirable from the buyer's perspective. For the seller, though, a stock purchase avoids a taxable event to the target corporation, and selling shareholders get favorable capital gains tax treatment on the cash proceeds they receive in the sale. Moreover, if selling shareholders receive stock of the acquirer in exchange for their shares of the target, then the shareholders can often avoid capital gains tax in a stock purchase.

Asset purchases and stock purchases involve trade-offs between buyers and sellers, both for accounting purposes and in the areas of financial and legal liability. Knowing the implications can help you better understand the decisions that acquiring and target corporations make in a takeover deal.

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