How bargain purchases in business combinations are recognized and disclosed under IFRS 3 and ASC 805

Graziano Stefanelli
1 day ago
4 min read

A bargain purchase (negative goodwill) arises when the fair value of the identifiable net assets acquired exceeds the consideration transferred (plus any non-controlling interests and previously held interests). Although rare, it happens in distressed sales, compelled divestitures, or volatile markets. IFRS 3 and US GAAP (ASC 805) both require a rigorous reassessment to validate the apparent gain and then recognize a gain in profit or loss if the bargain remains.

·····

.....

Why a bargain purchase can occur and when to suspect one.

Bargain outcomes typically reflect market pressure rather than valuation error. Triggers include court-mandated disposals, covenant breaches, strategic exits under time pressure, or asset values buoyed by recent revaluations (e.g., investment property at fair value) relative to a low sale price.

Before recording a gain, both frameworks demand a measurement review: re-check the fair values of identifiable assets and liabilities, contingent consideration, NCI measurement basis, and the completeness of recognized intangibles (customer relationships, technology, brands). Many “bargains” disappear once intangibles and provisions are properly measured.

·····

.....

The measurement review must eliminate errors before recognizing any gain.

Required steps (both frameworks):

Reassess consideration — include contingent consideration at fair value.
Reassess identifiable assets and liabilities — ensure all separable intangibles are recognized and all obligations (e.g., onerous contracts, environmental provisions) are measured at fair value at the acquisition date.
Reassess NCI — if measured at fair value (vs proportionate share), confirm the valuation and control premiums/discounts.
Reassess previously held interest (step acquisition) — remeasure to fair value at the acquisition date and recognize the remeasurement gain or loss separately from any bargain result.

If, after this review, net identifiable assets still exceed the “deemed consideration,” a bargain purchase exists.

·····

.....

How the gain is measured and recorded under IFRS 3 and ASC 805.

Computation (acquisition date):

Bargain purchase gain= Fair value of identifiable net assets acquired− (Consideration transferred + Fair value of any NCI + Fair value of previously held interest)

If the result is positive, recognize a gain in profit or loss.

IFRS 3 journal entry (simplified):

Dr Identifiable Assets at FV …… xx
Dr Goodwill ………………………………… 0
Cr Identifiable Liabilities at FV … xx
Cr Cash / Equity / Contingent Consideration … xx
Cr Gain on Bargain Purchase (P&L) … balancing

US GAAP (ASC 805) journal entry (simplified):

Dr Identifiable Assets at FV …… xx
Cr Identifiable Liabilities at FV … xx
Cr Cash / Equity / Contingent Consideration … xx
Cr Gain on Bargain Purchase (Earnings) … balancing

Under both frameworks, there is no negative goodwill line on the balance sheet; the difference is recognized immediately as income after passing the measurement review.

·····

.....

Special scenarios change the sequence but not the core outcome.

Step acquisitions (IFRS 3 / ASC 805):Revalue any previously held interest to fair value first (P&L gain/loss). Then perform the bargain test using the remeasured carrying amount.

Contingent consideration:Measured at fair value on day one; increases the “consideration transferred” and may eliminate an apparent bargain.

NCI measurement choice (IFRS):Measuring NCI at fair value (vs proportionate net assets) increases the denominator, reducing the likelihood of a bargain.

Pre-existing relationships and settlement features:Amounts that settle pre-combination arrangements (e.g., litigation, supply contracts) are accounted for outside the business combination, which can affect whether a bargain remains.

·····

.....

Worked example with numbers and acquisition-date entries.

Facts:

Consideration paid in cash: €90,000,000
NCI (20%) measured at fair value: €20,000,000
Previously held interest: none
Identifiable assets at fair value: €150,000,000
Identifiable liabilities at fair value: €30,000,000
Net identifiable assets: €120,000,000

Bargain gain calculation:€120,000,000 − (€90,000,000 + €20,000,000 + €0) = €10,000,000

IFRS / US GAAP entries (simplified):

Dr Identifiable Assets (FV) …… 150,000,000
Cr Identifiable Liabilities (FV) … 30,000,000
Cr Cash (consideration) …………… 90,000,000
Cr NCI (equity, at FV) ……………… 20,000,000
Cr Gain on Bargain Purchase … 10,000,000

If contingent consideration at fair value of €12,000,000 existed, the gain would reduce to €−2,000,000 (no bargain) and instead a goodwill balance of €2,000,000 would result.

·····

.....

What must be disclosed so readers understand a bargain purchase.

IFRS 3 disclosure package:

The fact that a bargain purchase occurred and the amount of the gain.
Primary reasons for the transaction being a bargain (distress, forced sale, market dislocation).
The acquisition-date fair values of major classes of assets acquired and liabilities assumed.
Revenue and profit of the acquiree included since acquisition and pro-forma results as if the combination had occurred at the beginning of the period.

ASC 805 disclosure package:

Same core elements: qualitative reasons for the bargain, quantitative gain recognized, and detailed fair value allocation.
Breakout of measurement period adjustments (if any) that change the provisional amounts within the allowed window.

Measurement period adjustments (both):Within the measurement period, if new information about facts and circumstances on the acquisition date emerges, adjust provisional fair values retrospectively. If such adjustments eliminate or create a bargain, restate the initial accounting and adjust the gain accordingly.

·····

.....

How a bargain purchase affects performance metrics and taxes.

Earnings volatility: The gain hits the income statement once; EBITDA impact depends on presentation policy (usually below operating profit).
Future depreciation/amortization: Higher fair values of identifiable assets raise future D&A; the day-one gain does not reverse but higher D&A reduces later profits.
Covenants: A large non-operating gain can inflate net income; lenders often exclude such gains in covenant calculations.
Deferred tax: Fair value step-ups typically create DTLs, which reduce the net bargain gain recognized.

·····

.....

Control checks and audit-ready documentation.

Maintain a valuation file supporting all fair value measurements, including methodologies and key assumptions for intangibles and provisions.
Document the reassessment that eliminated errors before recognizing the gain.
Track contingent consideration assumptions and sensitivity; disclose significant drivers.
Reconcile the purchase price allocation (PPA) to the final journal entries, including tax effects and NCI basis.
Establish governance for measurement period updates to avoid misclassification of post-combination events as acquisition-date facts.

A validated bargain purchase is an accounting outcome, not a goal. The standard-required reassessment protects statements from artificial gains that would otherwise arise from incomplete PPAs or mismeasured intangibles.

·····

.....

DATA STUDIOS

..... [datastudios.org]