ChatGPT & AI in
Procurement Course
Free Preview Lesson
Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Acquisition Cost — Everything You Should Know
Key take-aways
- Critical for determining the historical cost of an asset on financial statements.
- Used in calculating depreciation expenses over the useful life of the asset.
- Essential for tax calculations, helping companies avoid underpaying or overpaying taxes.
Acquisition cost helps businesses to accurately track the total cost of acquiring an asset. However, what is it?
In this article, we will discuss what acquisition cost means. We will tell you its importance and the typical acquisitions that a business makes. Additionally, we will also tell you the formula for the acquisition cost.
Once you finish reading this article, you will have a better understanding of what cost acquisitions are. Thus, you will be able to know the total cost of acquiring an asset and make informed decisions about your purchases.
Acquisition Cost: What is it?
Acquisition cost, also known as the cost of acquisition, refers to the total amount of money a company spends when acquiring new assets, obtaining new clients or customers, or acquiring another company.
The actual cost will depend on various factors such as the purchase price, financing costs, taxes, and other expenses. To determine the required amount, it is important to calculate the acquisition cost, which includes all the expenses associated with acquiring the asset.
Acquisition costs are useful as they provide a more accurate representation of a company’s expenses on financial statements than other measures.
In procurement, acquisition cost refers to the total cost that the business or individual incurred to acquire an asset, such as property, equipment, or inventory.
The acquisition cost includes all the expenses associated with the purchase, such as the purchase price, taxes, shipping, installation, and any other related costs.
For example, if a business purchases a new piece of equipment for $10,000, and pays $1000 for shipping and $1,000 for installation, the acquisition cost would be $12,000.
Importance of Acquisition Cost
Acquisition cost is important for several reasons. Firstly, the acquisition cost is a critical factor in determining the value of an asset for accounting purposes. When an asset is acquired, the cost is recorded as its historical cost on the balance sheet. Thus, it helps in calculating depreciation expenses over the useful life of the asset.
Secondly, the acquisition cost is vital to calculate taxes. The cost is used to calculate the tax basis of an asset, which is the amount used to determine gains or losses when the asset is sold or disposed of. This is important as it helps companies in avoiding underpaying or overpaying taxes.
Moreover, acquisition cost is also an important factor in evaluating the profitability of an investment. By comparing the acquisition cost with the expected future cash flows generated by the asset, businesses, and individuals can determine the return on investment (ROI) and make informed investment decisions.
Lastly, knowing the acquisition cost enables businesses to compare the cost of acquiring similar assets from different suppliers. This helps you to negotiate better prices and reduce costs.
Types of Business Acquisitions
Here are some of the common types of acquisitions that businesses make:
1. Vertical acquisition
This type of acquisition refers to a case when a business acquires another company in the same industry or sector that it perceives as a rival. This acquisition usually benefits both parties.
2. Horizontal acquisition
This refers to a form of acquisition where a company acquires a distributor or supplier that provides products related to what the company sells. This type of acquisition usually grants the purchasing company greater authority over the supply chain.
3. Conglomerate acquisition
This occurs when a company acquires a firm that operates in a completely different industry or sector. This type of acquisition is made to achieve diversification, which allows the acquiring company to enter new industries.
4. Product or equipment acquisition
This refers to the acquisition of new or used equipment or machinery. This can also refer to goods or materials that you need to create your products.
5. Land acquisition
Land acquisition refers to when a company purchases land or building. This is typically done to expand the amount of production space available.
Acquisition Cost Formula
Below is the acquisition formula that many accountants and businesses recognized:
Acquisition cost = (cost of acquisition + any other expenses that are related to the acquisition) – (depreciation + amortization + impairment costs + taxes)
Example: A company bought a parcel of land for $90,000 and incurred an additional cost of $20,000 for the title transfer and full land inspection during the acquisition. Also, there were taxes associated with the purchase amounting to $9,000. Therefore, the total acquisition cost of the land would be $101,000 ($90,000 + $20,000 + $9,000 = $119,000).
Conclusion
Understanding acquisition costs is crucial for businesses as it allows them to accurately assess the total expenses incurred when acquiring assets, clients, or other companies. This article has provided a comprehensive overview of acquisition costs, emphasizing their definition, importance, and the typical acquisitions businesses undertake.
By grasping the concept of acquisition costs, readers can make informed decisions regarding their purchases and assess the value of assets for accounting and tax purposes.
Frequentlyasked questions
What is the acquisition cost?
It refers to the total amount of money a company spends when acquiring new assets, obtaining new clients or customers, or acquiring another company.
Why is it important?
Acquisition cost is an important metric that helps companies and individuals accurately track the total cost of acquiring an asset.
What are some examples of additional costs that may be included in acquisition costs?
Some examples of additional costs that may be included in acquisition costs are taxes, legal fees, shipping and handling fees, installation costs, and other related expenses.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
