purchase accounting

An accounting method used in mergers in which the purchasing company adds the acquired company’s assets to its balance sheet using a fair market value. The acquired company is treated as an investment. Any premium paid above the fair market value is attributed to goodwill on the purchasing company’s balance sheet. As of 2001, the Financial Accounting Standards Board (FASB) required the purchase method to be used for all mergers and disallowed the tax-free pooling-of interest accounting method, in which the companies’ assets and liabilities were added together.