What Is a Basket Purchase & How Is It Accounted For?
Discover how to account for a basket purchase, where multiple assets are acquired for a single price, ensuring accurate financial valuation.
A basket purchase occurs when a company acquires several assets for one combined price rather than negotiating individual prices for each asset. This type of acquisition is common in various business transactions, such as the purchase of a business unit or a collection of property, plant, and equipment. Accounting for these transactions requires careful consideration to properly assign a cost to each acquired asset.
Defining Characteristics
A basket purchase is characterized by the acquisition of two or more distinct assets as part of a single transaction. A defining feature is the absence of individually negotiated prices for each asset within the bundle. Instead, a single, non-itemized purchase price is paid for all assets combined. This singular pricing mechanism necessitates a specific approach to allocate the total cost among the various components.
Cost Allocation Methods
When a basket purchase occurs, the lump-sum purchase price must be allocated among the individual assets acquired. The most common approach for this allocation is the relative fair value method. Fair value, in this context, refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This value is often determined through appraisals, market comparisons, or discounted cash flow analyses.
To apply the relative fair value method, the fair value of each individual asset within the basket must first be determined. These individual fair values are then summed to arrive at a total fair value for all acquired assets. A proportion is calculated for each asset by dividing its individual fair value by the total fair value of all assets. This proportion is applied to the total lump-sum purchase price paid to determine the cost allocated to each specific asset. This allocation is used for various accounting purposes, including calculating depreciation expense, determining gain or loss upon the future sale of an individual asset, and ensuring accurate balance sheet presentation.
Illustrative Examples
Consider a scenario where a company acquires land, a building, and equipment for a total lump-sum price of $1,000,000. An independent appraisal determines the fair value of the land to be $300,000, the building at $600,000, and the equipment at $200,000. The total fair value of these assets combined is $1,100,000.
To allocate the $1,000,000 purchase price, the proportion of each asset’s fair value to the total fair value is calculated. For the land, the proportion is $300,000 / $1,100,000, or approximately 27.27%. The allocated cost to the land would then be 27.27% of $1,000,000, which equals $272,700. Similarly, for the building, the proportion is $600,000 / $1,100,000 (approximately 54.55%), resulting in an allocated cost of $545,500. The equipment’s proportion is $200,000 / $1,100,000 (approximately 18.18%), leading to an allocated cost of $181,800. The sum of these allocated costs ($272,700 + $545,500 + $181,800) precisely matches the total purchase price of $1,000,000.