Bargain purchases

Why does a bargain purchase happen?

A seller may accept less than fair value when it is forced to sell quickly: a distressed sale by a company in financial difficulty, a disposal required by a competition authority, or the break-up of a group. A bargain purchase can also arise because IFRS 3 requires some items, such as deferred tax, to be measured at amounts other than fair value. More often, apparent negative goodwill points to an error in the purchase price allocation.

What must be reassessed before recognising a gain on bargain purchase?

1. Whether all assets acquired and liabilities assumed have been identified, including contingent liabilities and obligations the seller did not record.
2. The measurement of the identifiable assets and liabilities, the non-controlling interest, any previously held interest, and the consideration transferred.

The aim is to make sure the measurements reflect all available information at the acquisition date. Only what remains after this review is a gain.

A worked bargain purchase example

A company buys 80% of a struggling competitor from its lenders for 420. The first purchase price allocation shows identifiable net assets of 580. During the reassessment, the acquirer's specialists identify an environmental clean-up obligation of 40 at an acquired site, with a deferred tax asset of 10 at 25%.

The gain on bargain purchase of 20 is recognised in profit or loss on the acquisition date, attributable to the acquirer. Without the reassessment, the gain would have been overstated by 24, and a liability would have been missing from the balance sheet. Auditors expect to see the reassessment documented before any gain is booked.

Can measurement rules create an apparent gain?

Yes. IFRS 3 measures some items at amounts other than fair value, such as deferred tax under IAS 12 and employee benefit liabilities under IAS 19. A large deferred tax asset recognised on acquired tax losses, for example, can push identifiable net assets above the price paid even when the deal was at fair value. Those gains are real under the standard, but the reassessment should confirm that each amount follows the rules.

Is a bargain purchase the same as negative goodwill?

It is the modern treatment of what older standards called negative goodwill. Under IAS 22, negative goodwill was held on the balance sheet and released to income over time. IFRS 3 has required immediate recognition in profit or loss, after reassessment, since 2004.

Common mistakes

• Recognising the gain without documenting the reassessment.
• Missing contingent liabilities and obligations the seller did not record.
• Overvaluing acquired intangibles or inventory to an amount no market participant would pay.

How is the gain presented and disclosed?

As a separate line or within other income, in the period of acquisition. The acquirer discloses the amount of the gain, the line item in which it is recognised, and why the transaction resulted in a gain. Under IFRS 18 the gain is in the operating category for most companies.

How does US GAAP compare?

US GAAP has the same requirements: reassess, then recognise any remaining gain in earnings on the acquisition date, with similar disclosures. See purchase price allocation, IFRS 3 explained and contingent liabilities, which an acquirer must recognise even when an outflow is not probable. The Purchase price allocation model (Excel) flags a bargain purchase automatically.

This guide is general information. It is not tax or legal advice for your situation.