The purchase method and the equity method joint Discussion

Abstract: The method of accounting for business combinations using the purchase method, and equity are combined method. Both deal with pricing based on different, after the merger of the accounting information have different effects. Article mainly analyzes merged under the two methods combined business financial condition, results of operations and financial indicators, and its lack of rationality and for superficial evaluation.

Keywords: mergers, the purchase method, equity joint law

With the development of market economy, corporate merger phenomenon has appeared more and more in the economic life of the modern large company formation and development of effective means when the company developed to a certain stage, in order to achieve economies of scale, expand business channels, opening up invest in new areas or markets, often through mergers and other enterprises to enhance their own strength. merger under this article only two ways to deal with as an Analysis.

First, the accounting treatment of business combinations

The purchase method and the equity method is a combination of two kinds of business combination accounting treatment. Merger guidelines will be divided into business combinations under common control business combinations and non-business combination under common control, the former using the combined method similar interests, the latter using the purchase France the two methods in the specific accounting treatment, the resulting economic impact, the theoretical basis and there exist many differences.

First, the purchase method. Purchase method combining party obtains the net assets of the merged party as a transaction with the enterprise asset purchase transactions generally the same, there is no essential difference, therefore, the purchase method requires at fair value reflects the combined party assets and liabilities and their fair value is reflected in the combined party accounts and reports. purchase cost of assets paid as consideration, the assumption of debt or equity securities issued are included in the fair value of the purchase cost and the fair value of net assets acquired is recognized as goodwill. because non-business combination under common control are mostly of a merger between non-affiliated companies, often based on market price, based on the relative fair trade, so the use of the purchase method of accounting.

Second, equity joint method. Equity joint method to business combinations as merger of enterprises participating joint economic resources, equity joint behavior is not an enterprise of another entity's net assets transactions, therefore, should not be the basis of valuation change, merging parties acquiree's assets and liabilities should be reflected in the original book value, merging parties recorded value of net assets acquired as consideration for the merger with the assets paid, the assumption of debt or equity securities issued book value, should Adjust the owner's equity-related projects, are not recognized as goodwill. usually a business combination under common control occurred between enterprises within the same group, belonging to the merger between associated enterprises, the fair price is weak, so the combined method for using the equity of accounting.

Second, the two methods, the analysis of the results

Since both methods during the accounting treatment to be applied when different valuation basis, which may often be merged party production operations, financial condition, results of operations will produce different effects.

First, on the financial position of the merging parties. Purchase method, the merging parties is to be and corporate assets and liabilities at fair value incorporated into the equity joint law is incorporated by book value, or the rise in prices and square asset quality is better in the case, the asset's fair value is often greater than the carrying value of goodwill may also be accompanied by the presence, so the purchase method reported sizable assets and liabilities are generally not changed, and therefore the number of net assets gifted combined equity method, application of the equity method joint report smaller asset.

Second, the results of operations of the combined side effects. Reported under the purchase method of asset value is generally higher than equity joint method, since these assets will translate into cost, if there is the case of goodwill, as well as provision for impairment the possibility of the company's future operating costs have increased. Moreover, under the law of equity joint merger usually intersect in exchange for shares issued to complete the purchase method is usually used to pay cash or assumed debt ways to accomplish, but also the burden of borrowing Interest expense, so after the merger report less interest in the profitability of the purchase method combined method.

Third, the impact of production and operation of merging parties. Purchase method reported lower profits, can reduce the income tax cash outflows, to enable enterprises to reduce the pressure bonus cash dividends, cash can be settled in the enterprise, increasing the potential for enterprise development, production and management of assets cost is the value of compensation at fair value, usually does not affect the assets of the update and for simple reproduction. equity joint method reported higher profits would increase tax cash outflow of assets for production and operation cost is compensated by a lower book value and therefore there is inevitably inadequate compensation asset value, future updates will inevitably affect the asset, there may be virtual surplus real loss phenomenon, the investor's capital is difficult to preservation.

Fourth, the merging parties financial indicators. Equity joint method reported higher profits, assets and net assets of less, and thus higher-yielding assets, reflecting the capital turnover rate is faster than the same purchase method, can bring better effects of financial reports, but reflect solvency (such as asset-liability ratio is often weaker than the purchase method, if the carrying amount exceeds the fair value, the result is just the opposite.

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Third, the evaluation of two accounting treatments

Purchase method carried at fair value, better reflect the business combination is the result of fair trading, investors can better understand the present value of the resources made available, it is beneficial for merger decisions, but after the merger generally reported lower profits for profitability could be adversely affected, can not correctly evaluate the combined operating results. Goodwill is only recognized but also because the merging parties, the merging parties are not confirmed, the use of different policies is also illogical. Moreover, at this stage property rights trading market is not very mature, say each asset evaluation methods have some limitations, the results of asset valuation is difficult to guarantee fairness, may also exist the phenomenon of manipulation, the fair value of the reliability of the weak.

Combined book value of equity accounted basis, the carrying value is based on the original, can not easily be manipulated, the combined amount of each item when simply adding directly accounting simple and easy to operate, and in accordance with the historical cost accounting principles and basic accounting continuing operations Suppose, however, equity joint law does not reflect the value of real assets, companies may lurk potential gains and losses and if the book value is less than the fair value of corporate assets can be immediately sold into the rapid increase in current profits, operating loss is easy to conceal itself, as whitewash its performance provides room for maneuver, even if assets are not sold, the combined assets of all-consuming but also a lower value of compensation, which reported profits will be higher, even the existence of the phenomenon of virtual surplus real loss, erosion of investor's capital.

IV Conclusion

Two accounting treatment of business combinations have a certain rationality and applicability, but in the application process, there are still some shortcomings from the practice, however, the applicability of the purchase method of joint interest method over wide comparability of financial information and transparency strong, but China's current business combination under common control is still a certain amount of equity joint law There is still a need, therefore, at this stage of market economy cases, the coexistence of two methods merger is realistic. China's economic The development is still lagging behind, a business combination in theory and practice is not perfect, which we need to find the problem and avoid their weaknesses, to further improve the theory and practice with international standards completely.


1 Ministry of Finance Accounting Division to prepare a group. ASBEs explain [M]. People's Publishing House, 2010.

2 Huang Xi, Zhou Guoguang. Issues related to business combination accounting Rethinking [J]. Accounting Monthly, 2011 (5).

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