How measurement period adjustments in business combinations are recorded under IFRS 3 and ASC 805

When an acquirer takes control of a business, some values in the purchase price allocation are still provisional: fair values of acquired assets, liabilities, contingencies, or tax positions may need more evidence. IFRS 3 and ASC 805 allow a measurement period to finalize these estimates. During this window, adjustments based on additional information about conditions at the acquisition date are reflected retrospectively, often changing goodwill, comparatives, and disclosures.

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How the measurement period works and what it covers

The measurement period is a limited timeframe after the acquisition date during which the acquirer can update provisional amounts if it obtains new information about facts and circumstances that existed at the acquisition date.

Typical areas where provisional values arise include:

• Fair value of intangible assets, especially customer relationships and brands.

• Inventory fair value step-ups when detailed counts or margins are still being validated.

• Contingent liabilities such as litigation or environmental exposure.

• Deferred tax assets and liabilities, including valuation allowances and uncertain tax positions.

• Contingent consideration and other complex financial instruments.

The key principle is that measurement period adjustments must reflect better evidence of conditions that already existed, not new events arising later.

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IFRS 3 — rules for measurement period and retrospective restatement

Under IFRS 3, the measurement period:

• Begins on the acquisition date.

• Ends as soon as the acquirer receives the information it was seeking or concludes that such information cannot be obtained.

• Must not exceed 12 months from the acquisition date.

While amounts are provisional, the acquirer:

• Uses best estimates at the reporting date.

• Adjusts those provisional amounts when new information is obtained about acquisition-date conditions.

• Recognizes the adjustment retrospectively as if it had been known at the acquisition date.

Accounting consequences under IFRS 3:

• Adjust the carrying amount of recognized assets and liabilities to the new values.

• Adjust goodwill (or bargain purchase gain) for the corresponding effect.

• Restate prior-period comparatives as if the adjustment had been made from the acquisition date.

• Adjust depreciation, amortization, and deferred tax retrospectively based on the revised amounts.

Information about events after the acquisition date (for example, a new lawsuit initiated post-acquisition or a change in market conditions) does not go through the measurement period; those are treated as day-two items in profit or loss.

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ASC 805 — US GAAP approach to provisional amounts and changes

ASC 805 also allows provisional amounts, with a measurement period that:

• Begins at the acquisition date.

• Ends once needed information is obtained, but no later than one year from the acquisition date.

During this period, for items that are provisional:

• Adjustments based on new information about acquisition-date facts are treated as measurement period adjustments.

• Such adjustments are recorded retrospectively:

  • Adjust assets and liabilities to their revised amounts.

  • Adjust goodwill accordingly.

  • Recognize, in the current period, the effect on depreciation, amortization, or other income statement items that would have been recorded in prior periods, typically in the current-period income statement (rather than restating all prior periods in every circumstance, depending on materiality and SEC guidance for registrants).

Items that reflect new events after the acquisition date are not measurement period adjustments and go directly to earnings or other appropriate captions (for example, a new impairment indicator that arises after acquisition).

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Comparative framework — IFRS 3 versus ASC 805

Topic	IFRS 3	ASC 805
Maximum measurement period	Up to 12 months from acquisition date	Up to 1 year from acquisition date
Basis for adjustment	New information about conditions existing at acquisition date	Same: information about acquisition-date facts and circumstances
Effect on goodwill	Goodwill increased or decreased retrospectively	Goodwill adjusted for qualifying changes
Treatment of prior periods	Adjust as if known at acquisition date; comparatives restated when material	Adjust as if known at acquisition date; current period often includes the catch-up effect on earnings, with SEC guidance for restatements for registrants
Non-qualifying changes	Day-two items in P&L (no goodwill adjustment)	Post-combination earnings impact, no goodwill adjustment

Both frameworks treat the measurement period as a narrow exception to the normal rule that changes in estimates after acquisition go through profit or loss rather than goodwill.

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Worked example — inventory and intangible valuation finalized within the measurement period

Facts (currency: €):

• Acquisition date: 1 April Year 1.

• At 31 December Year 1, the acquirer has provisional amounts:

  • Inventory fair value step-up estimated at €3,000,000.

  • Customer relationship intangible estimated at €5,000,000.

• In March Year 2 (still within 12 months), further analysis shows:

  • Inventory step-up should have been €2,400,000 (lower by €600,000).

  • Customer relationship fair value should have been €5,800,000 (higher by €800,000).

Net effect on identifiable net assets at acquisition date: increase of €200,000 (−600,000 + 800,000).

Assume no deferred tax effects to simplify.

IFRS 3 — acquisition-date re-calculation:

• Initial goodwill was calculated based on provisional net assets.

• Revised goodwill = Original goodwill − €200,000 (because identifiable net assets at acquisition increased by €200,000).

Journal entries in Year 2 (measurement period adjustment):

To reduce inventory step-up retrospectively:

• Dr Goodwill 600,000

• Cr Inventory 600,000

To increase customer relationship intangible retrospectively:

• Dr Customer Relationship Intangible 800,000

• Cr Goodwill 800,000

Net goodwill reduction: €200,000.

Because inventory from acquisition date has already been sold:

• The lower inventory step-up means cost of sales for prior periods was overstated by €600,000.

Under IFRS 3, comparative information is restated:

• Year 1 opening retained earnings and comparative cost of sales are adjusted as if the correct step-up had been used from 1 April Year 1.

Similar logic applies for amortization of the customer relationship intangible, but the difference will generally be smaller and spread over its useful life.

Under ASC 805:

• The balance sheet at the end of the measurement period reflects the revised amounts.

• Goodwill is reduced by €200,000.

• The catch-up effect of the extra inventory expense relieved and the extra amortization that would have been recognized is typically included in the current period’s earnings, with disclosure that it relates to a measurement period adjustment.

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How measurement period adjustments interact with deferred tax and contingent consideration

Measurement period adjustments often arise for:

• Deferred tax: for example, new evidence that an acquired tax loss carryforward is realizable changes the initial DTA recognized.

• Contingent consideration: a revised fair value based on better information about acquisition-date expectations, as opposed to changed performance after the acquisition.

Deferred tax:

• If additional information within the measurement period shows a DTA should have been recognized at acquisition (for example, on NOLs), this reduces goodwill.

• Conversely, if a DTL should have been higher, goodwill increases.

Contingent consideration:

• Changes based on refined estimates of acquisition-date probabilities or cash flows, obtained within the measurement period, adjust goodwill.

• Changes driven by post-acquisition performance (for example, updated forecasts due to events after acquisition) are not measurement period adjustments; they go to profit or loss in both IFRS and US GAAP when contingent consideration is a liability.

Clear documentation is needed to distinguish between better evidence of acquisition-date conditions and new events.

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Journal entries summary for measurement period adjustments

IFRS 3 (typical patterns):

• If identifiable net assets are increased (for example, higher fair value of PPE):

  • Dr Asset (e.g., PPE, Intangible) xx

  • Cr Goodwill xx

• If identifiable net assets are decreased (for example, lower contingent liability than initially estimated):

  • Dr Goodwill xx

  • Cr Liability xx

Comparative figures and related depreciation, amortization, or interest are restated as if the new values were in place from the acquisition date.

ASC 805 (typical patterns):

• Similar balance sheet adjustments to assets, liabilities, and goodwill.

• The income statement effect of the change in depreciation, amortization, or other items that would have been recognized in prior periods is recorded in the current period earnings, accompanied by disclosure that it arises from measurement period adjustments.

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Disclosure requirements for measurement period adjustments

IFRS and US GAAP both emphasize transparent disclosure when provisional amounts are used and later adjusted. Entities should disclose:

• Which amounts are provisional at each reporting date and why.

• Nature and amount of measurement period adjustments recognized during the period.

• The line items affected in the statement of financial position and statement of profit or loss.

• For material changes, how prior-period information has been restated (IFRS) or how current-period results incorporate effects related to earlier periods (US GAAP).

In practice, note disclosures often include a reconciliation table showing:

• Provisional amounts originally recognized.

• Measurement period adjustments by category (PPE, intangibles, deferred tax, contingencies, contingent consideration).

• The resulting change in goodwill.

This gives users a clear view of how the acquisition accounting evolved during the measurement period and separates these effects from routine operating performance.

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Impact on financial performance, ratios, and deal reporting

Measurement period adjustments affect:

• Goodwill balance: increases or decreases as more accurate values for net assets are determined.

• Profit and loss pattern: restated depreciation and amortization (IFRS) or catch-up adjustments in the current period (US GAAP) alter trend analysis.

• Return metrics: ROA and ROE may change once fair value and goodwill are finalized.

• Communication with stakeholders: deal metrics (such as “goodwill per euro of consideration” or “accretive/dilutive effect”) may need updating after material measurement period adjustments.

Robust processes for fair value estimation, tax and legal due diligence, and timely information gathering reduce the scope and volatility of measurement period adjustments and keep acquisition reporting consistent.

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