How are direct acquisition costs accounted for?

Direct acquisition costs are accounted for separately from the business combination. This reflects a fundamental principle in accounting that ensures that the costs directly associated with the acquisition process—such as legal fees, due diligence expenses, and investment banking fees—are not included in the valuation of the acquired entity's assets and liabilities. Instead, these costs are typically expensed in the period they are incurred, which provides a clearer picture of the financial statements by distinguishing between the costs to acquire a business and the actual value of the assets and liabilities being acquired. This treatment helps maintain the integrity of the business’s financial reporting and ensures that the on-going operations and performance of the acquired business are not muddied by acquisition-related expenses.

In contrast, costs that are treated as part of the business combination would inappropriately inflate the value of the assets acquired, which goes against the accounting standards that require a clear delineation of acquisition-related expenditures. Other options, such as accounting solely for tax purposes or ignoring them altogether, do not align with the standards for transparency and accuracy in financial reporting.