Acquisition
In one sentenceA company buying a stake in another company sufficient to control it, with the acquired company usually continuing to exist with its own separate personality.
Simply put
After the acquisition, the acquired company becomes a subsidiary, so consolidated financial statements are prepared. What was paid is compared with its net assets at fair value: if the amount paid is higher, the difference is goodwill.
It is treated under IFRS 3 and may require approval from the General Authority for Competition. It is usually preceded by due diligence on the target company's books and liabilities.
Worked example
A distribution company bought 100% of a transport company for 5,000,000 SAR, and the transport company's net assets at fair value are 4,200,000 SAR.
Consideration paid5,000,000 SAR
Identifiable net assets at fair value4,200,000 SAR
Goodwill: 5,000,000 − 4,200,000800,000 SAR
Formula: Goodwill = consideration paid − identifiable net assets at fair value (when acquiring 100%)
Don't confuse it with
MergerIn a merger one or both companies cease to exist, while in an acquisition both continue and one becomes a subsidiary of the other.