The Acquisition Method: Recording a Business Combination

Introduction

On July 17, 2025, Synopsys completed its acquisition of Ansys, the engineering simulation company, for total consideration of about $34.9 billion: $17.6 billion in cash, 30.0 million Synopsys shares with a fair value of $17.1 billion, and smaller amounts for Ansys employee awards it assumed and for settling relationships the two companies already had. In its first annual report after closing, Synopsys recorded $13.0 billion of identified intangible assets, $2.6 billion of deferred tax liabilities and $23.4 billion of goodwill, two-thirds of the price. Its pro forma disclosures also treat about $298 million of transaction costs as non-recurring, costs that are expensed rather than added to the price.

Each of those figures comes from a defined step of the acquisition method, the single model US generally accepted accounting principles (GAAP) use for every business combination. The method decides who the acquirer is, when the deal happens, what was paid, what was bought and what is left over as goodwill. How an acquisition then flows through the three statements in the years after closing is a separate question, traced in acquisitions on the three statements.

Acquisition method

The method of accounting for business combinations under Accounting Standards Codification (ASC) 805. The acquirer recognizes the identifiable assets acquired, liabilities assumed and any noncontrolling interest at their acquisition-date fair values, with limited exceptions, measures the consideration transferred at fair value, and records goodwill, or in rare cases a bargain purchase gain, for the difference.

The method applies only when the target is a business; acquisitions of assets that do not form a business follow different rules, covered in business combination or asset acquisition?. For a business, the method has four steps:

In a cash deal, the acquirer is usually clear: the company paying cash ends up controlling the target. In a share-for-share merger, it can be less clear, and the accounting acquirer may not be the company that legally issues the shares. ASC 805 looks at which combining company's owners hold the largest share of votes in the combined entity, which side controls the board, whose former managers dominate senior management, which company pays a premium over the other's market value, and which is larger, as Deloitte's guide to identifying the acquirer explains. No factor is decisive on its own.

When the analysis points to the legal target, the deal is a reverse acquisition: the company issuing shares is treated as acquired, and the company whose shareholders end up in control is the accounting acquirer, whose historical statements continue. This is common when a private company merges into a smaller listed one. The same analysis drives most mergers with a special purpose acquisition company (SPAC), although a SPAC is not itself a business, so those deals are usually accounted for as a reverse recapitalization, with no goodwill, as covered in reverse acquisitions and SPAC merger accounting.

Mergers of Equals

Deals presented as mergers of equals, with an even split of board seats and a new name, still need an accounting acquirer: US GAAP no longer allows the pooling of interests, which simply added two companies' book values together. The factors are weighed together, and small differences, such as which company's shareholders receive a slightly larger share of the combined company, which chief executive leads it, or which side pays a premium, decide which company's assets and liabilities are written up to fair value and which company's history becomes the combined company's history. The choice can change reported goodwill, amortization and earnings for years.

The Acquisition Date

The acquisition date is the date the acquirer obtains control, normally when the deal closes and consideration is transferred. Everything is measured at that date: the fair value of the shares issued, the target's assets and liabilities and the noncontrolling interest. Results of the target are included in the acquirer's statements only from that date, which is why Synopsys's fiscal 2025 results, for the year to October 31, include Ansys for only about three and a half months.

Consideration transferred is measured at fair value on the acquisition date. Cash is the simplest element: the amount paid to the target's shareholders. Shares issued by the acquirer are measured at their market price on the acquisition date, not on the date the deal was announced or agreed. Synopsys issued 30.0 million shares, valued at $17.1 billion at $571.20 a share, its price on the acquisition date, alongside $17.6 billion of cash for 88.1 million Ansys shares at $199.91 each.

Consideration transferred

The total fair value, at the acquisition date, of the assets the acquirer gives up, the liabilities it incurs to the target's former owners and the equity interests it issues in exchange for control of a business, including contingent consideration and the pre-combination portion of replacement employee awards. Transaction costs are excluded and expensed.

Two other elements need more judgment. When the acquirer replaces the target's employee options and restricted stock with its own awards, the fair value of the replacement awards is split: the portion attributable to service employees provided before the deal is part of the consideration, and the portion attributable to service after it is compensation expense of the combined company, recognized over the remaining vesting period, as described in stock-based compensation accounting. Synopsys counted $131 million of assumed Ansys awards as consideration. Contingent consideration, such as an earnout payable if the target hits revenue or profit targets, is recognized at its fair value at closing; when it is classified as a liability, as cash earnouts are, later changes in that fair value run through earnings, as covered in earnouts and contingent consideration.

Because shares are measured at closing, a move in the acquirer's share price between announcement and completion changes the reported price and the goodwill, even though the exchange ratio is fixed.

Some payments are excluded from consideration. Transaction costs, such as advisory, legal and accounting fees, are expensed as incurred; only the costs of issuing the debt or shares that fund the deal follow other rules, reducing the debt or equity raised, as covered in transaction costs and financing fees. The expense usually brings little tax relief: advisory fees that facilitate a share purchase are generally not deductible but are capitalized into the acquirer's tax basis in the target's shares, under the Treasury regulation on acquisition costs. Payments to the target's owners that are really compensation, for example amounts forfeited if they leave, are expensed after the deal. And the settlement of a relationship that existed before the deal, such as a supply contract or a lawsuit between the two companies, is accounted for separately, with any gain or loss in earnings; Synopsys shows such settlements as a separate $8.8 million line in its purchase price table.

The acquirer recognizes every identifiable asset and liability of the target at fair value, whether or not the target had recorded it. That brings onto the balance sheet internally generated intangibles whose cost the target had expensed, such as technology, customer relationships and brands, which is how Synopsys came to record $13.0 billion of Ansys intangibles: $6.5 billion of developed technology, $5.1 billion of customer relationships, $0.95 billion of trade names and $0.44 billion of contract rights for orders already received. Their valuation, by methods such as relief-from-royalty and multi-period excess earnings, is described in purchase price allocation.

Synopsys's 2025 annual report shows the full preliminary allocation:

Two items are treated differently from what intuition suggests. An assembled workforce, however valuable, is not an identifiable asset and is subsumed into goodwill. In-process research and development acquired in a business combination, by contrast, is recognized at fair value as an indefinite-lived intangible asset until the project is completed or abandoned, unlike in an asset acquisition, where it is usually expensed at once.

The Exceptions to Fair Value

A handful of items are recognized or measured under other standards rather than at fair value. The most significant is income taxes. Deferred tax assets and liabilities are measured under ASC 740 on the differences between the new book values and the target's tax bases, not at fair value. In a stock acquisition, the target's tax bases usually carry over unchanged, so writing its assets up creates deferred tax liabilities; Synopsys's $2.6 billion deferred tax liability reflects largely the intangibles it recorded, the mechanism explained in asset write-ups and the deferred taxes they create. Those liabilities in turn increase goodwill.

Several other exceptions follow the relevant standards. Leases acquired are measured as if they were new leases at the acquisition date, with the lease liability at the present value of the remaining payments. Employee benefit obligations, such as pension deficits, are measured under the pension and benefits standards. Indemnification assets, where the seller has agreed to cover a specific liability, are measured on the same basis as the liability they protect. Assets the acquirer intends to sell are measured at fair value less costs to sell. And since Accounting Standards Update (ASU) 2021-08, contract assets and contract liabilities from customer contracts are measured as the target would have measured them under ASC 606, rather than at fair value.

Deferred Revenue After ASU 2021-08

The deferred revenue change matters most for software and subscription companies, whose balance sheets carry large amounts of deferred revenue, cash collected in advance for services still to be delivered. Before ASU 2021-08, acquirers often wrote deferred revenue down to the cost of fulfilling the obligation plus a margin, so revenue the target had already been paid for never appeared in the acquirer's income statement, a so-called deferred revenue haircut. Now the target's deferred revenue, $671 million at Ansys, carries over at roughly its book amount and is recognized as revenue as before, as Deloitte's summary of the update explains.

Contingencies of the Target

Lawsuits, warranty claims and other contingencies of the target are recognized at fair value at the acquisition date if fair value can be determined; if it cannot, they are recognized only if a loss is probable and estimable, under the general contingency rules covered in contingencies and litigation reserves. Acquirers often negotiate specific indemnities or escrows for the largest exposures, and the corresponding indemnification asset is recorded alongside the liability, so that a seller-backed claim does not distort the acquirer's results.

Noncontrolling Interests and Earlier Stakes

When the acquirer buys less than all of the target, the noncontrolling interest is recognized at its fair value at the acquisition date, often a little below a pro rata share of the price paid for control, because a minority stake carries no control premium. Goodwill is then calculated for the whole business. When the acquirer already held part of the target before gaining control, that previously held stake is remeasured to fair value at the acquisition date, with any gain or loss in earnings, and its fair value is added to the consideration in the goodwill calculation, as described in step acquisitions and changes in ownership.

Goodwill is the residual: consideration transferred, plus the fair value of any noncontrolling interest and of any previously held stake, minus the net identifiable assets. It represents synergies, the assembled workforce and other value that cannot be recognized separately; Synopsys attributes its Ansys goodwill mainly to the assembled workforce and expected synergies, assigned it to its Design Automation reporting unit, and notes that it is not tax-deductible. What drives goodwill, and the rare case where a buyer records a gain instead, is covered in how goodwill is created and bargain purchases.

Fair values for a large acquisition take time to finalize. The acquirer records provisional amounts and has a measurement period of up to one year after the acquisition date to adjust them for information about facts that existed at that date. Adjustments, which usually move amounts between intangibles, deferred taxes and goodwill, are recognized in the period they are identified, with any related effect on depreciation or amortization recorded at the same time.

Synopsys described its Ansys allocation in its first annual report as preliminary, especially for goodwill, intangibles, certain tangible assets and liabilities, and income taxes. In the event, the changes were small: measurement period adjustments in the nine months to July 2026, mainly to income tax liabilities, added $18 million to goodwill and left the $12.99 billion of intangibles unchanged, according to its quarterly report for that period.

Assigning Goodwill to Reporting Units

Goodwill is assigned at the acquisition date to the reporting units expected to benefit from the deal, which may include existing units of the acquirer if synergies will arise there. The assignment matters later, because impairment testing is done unit by unit: goodwill placed in a unit with plenty of headroom is far less likely to be written down than goodwill placed in a unit already close to its carrying amount. Synopsys assigned all of its Ansys goodwill to Design Automation, the reporting unit that includes the combined simulation and design software business.

Regulatory Divestitures

Deals that need antitrust approval often require the parties to sell businesses. Synopsys agreed to sell its Optical Solutions Group to Keysight Technologies, and Ansys its PowerArtist business, as a condition of approval, and Synopsys recorded a net pre-tax gain of $516 million on the two sales. Divestitures by the acquirer are its own disposals, with gains or losses in earnings; businesses of the target that are to be sold are acquired as assets held for sale, measured at fair value less costs to sell.

How the Form of Payment Shapes the Accounts

The accounting for the target is the same whether the buyer pays in cash or in shares, but the buyer's own statements differ. A cash deal reduces cash or adds debt: Synopsys funded its cash consideration from cash on hand, new senior notes and a term loan, so its interest expense and leverage rose after closing. A share deal increases the buyer's equity and share count instead, diluting existing holders but adding no new debt. Mixed deals, like Synopsys's, combine the two. These effects, rather than the purchase accounting itself, usually decide whether a deal raises or lowers the buyer's earnings per share, which is analyzed in the Valuation guide's treatment of accretion and dilution analysis.

The acquisition method also requires the target's tangible assets to be remeasured to fair value, usually above book value. Inventory recorded above the target's cost reduces gross margin as it is sold in the first months after closing, and property and equipment written up increases depreciation for years. For a software business like Ansys, these effects are small; for an industrial or consumer target, the inventory step-up alone can depress the first quarters' margins noticeably, and bankers remove it when calculating underlying profitability.

Tax Structure

The tax structure of a deal matters too. In a stock acquisition like Synopsys's, the target's tax bases carry over and goodwill is not deductible; in an asset acquisition, or a stock deal treated as one for tax, the buyer gets a stepped-up tax basis and can deduct goodwill and intangibles over fifteen years. The cash value of those deductions often justifies a higher price, as discussed in stock deals vs asset deals.

Amortization, Pro Formas and Ratios

The acquisition method rebases the target's balance sheet and reshapes the acquirer's future earnings. Identified intangibles with finite lives are amortized: Synopsys's Ansys intangibles, over lives from two to twenty-three years, imply roughly $1.6 billion a year of amortization at first, most of it from developed technology and customer relationships; the charge was already $458 million in the three and a half months Synopsys owned Ansys in fiscal 2025. Goodwill is not amortized but is tested for impairment. Because the amortization reflects purchase accounting rather than operations, most acquirers exclude it from adjusted earnings, and bankers generally accept that adjustment while remembering that the acquisition cost was real.

The disclosures that accompany a business combination are designed to support exactly this analysis. For each material deal, the acquirer must describe the primary reasons for the acquisition and the qualitative factors behind the goodwill, give the amounts of revenue and earnings of the target included since the acquisition date, and disclose the fair value of each major class of consideration and of assets acquired and liabilities assumed. For deals that close after the balance sheet date but before the statements are issued, the same information is required where it is available.

The allocation also changes the ratios built on book values. A company that has made large acquisitions carries goodwill and intangibles that an organic grower does not, which enlarges its invested capital and lowers its return on invested capital. Comparing the two on tangible measures, or on cash flow, puts them on a more equal footing. And because every number in the allocation is a fair value estimate made at the acquisition date, the first annual impairment tests after a large deal are worth reading closely: they show whether the price paid is still supported by what the business is expected to earn.