Acquisition Cost

An acquisition cost likewise alluded to as the acquisition cost, is the absolute cost that an organization perceives for property or hardware in its books in the wake of paying for limits, rewards, shutting costs, and other vital costs however before deals charges. It is generally used in three different contexts in business, which includes the following:

  • Mergers and acquisitions
  • Fixed assets
  • Customer acquisition

The cost of acquisition represents the value of money transferred to a target company from an acquiring company to purchase a part of the target or the target company as a whole. With regard to fixed assets, the acquisition cost represents the total cost for a capital asset that a company recognizes on its balance sheet. It may also entail the number needed to require over another firm or purchase an existing business unit from another company. Additionally, a sale cost can describe the prices incurred by a business in regard to the efforts involved in acquiring a brand new customer.

Acquisition Cost

The definition of acquisition cost helps to assess the actual expenditures of an asset; it involves not only the purchase price but also many other costs. Alternatively referred to as book value, this expense is listed under the balance sheet section on fixed assets. In the context of customer acquisition, the acquisition cost represents the funds wont to expose new customers to a company’s products within the hopes of acquiring the customer’s new business. Identifying the true cost of fixed assets is valuable because it covers things such as legal fees and bonuses and excludes discounts and closing costs.

The acquisition cost should be distinguished from the purchase price. While they may usually be similar, other costs associated with an acquisition are included in the acquisition bill, in addition to the purchase price. Acquisition costs represent the true amount charged for fixed assets prior to the payment of sales tax, expenditures related to the acquisition of a new client, or the acquisition of other businesses. Acquisition costs also include those special carrying costs which occur particularly just in the case of machineries and plant. Any costs incurred to place that exact asset into an operational state are included in its acquisition costs likewise.

Acquisition costs are beneficial because they consider an expense on a company’s financial statements that is more practical than using other indicators. Any estimated costs can also be accounted for in arriving at the correct acquisition costs of an asset. These expenses will include earned discounts, depreciation, cost of disability, amortization, etc. It is determined by the merchandise between the exchange ratio and also the number of outstanding shares of the company. For example, the purchase cost of land, plant, and equipment (PP&E) reflects any discounts or extra costs that the firm may incur and is also referred to as the asset’s original book value.

If we calculate the acquisition cost please in strict accounting terms, we will use this method to do so.

AC = (Added direct expenses affecting to acquisition + buying price) – (Amortization + Impairment costs + depreciation + Taxes)

Additional costs should be considered and listed on the balance sheet as part of the cost of the fixed assets, in addition to the total price charged for an asset itself. Other costs may include tax, transaction fees, legal fees, and regulatory fees. Besides the worth got the asset itself, additional costs may additionally be considered a part of acquisition when these costs are directly tied to the acquisition process. It is necessary to make all the changes as the costs and expenditures are significant in order to get the asset to its intended use.

The changes should be reflected on the balance sheet so that the balance sheet is a more reliable reflection of the financial condition of a company in relation to the cost of capital assets. With respect to manufacturing or processing equipment, the procurement costs may also include any costs associated with getting the equipment to an operational state. This includes the value of shipping & receiving, general installation, mounting, and calibration.

 

Information Sources:

  1. readyratios.com
  2. investopedia.com
  3. corporatefinanceinstitute.com