Definition
A bargain purchase occurs when the acquisition-date fair value of identifiable net assets acquired exceeds the sum of consideration transferred, any noncontrolling interest, and any previously held equity interest. ASC 805 requires the acquirer to first reassess whether it has correctly identified all assets and liabilities and reviewed the measurement procedures. If an excess remains, the acquirer recognizes a gain in earnings on the acquisition date, attributed to the acquirer. Bargain purchases are uncommon, and often happen in forced or distressed sales.
Why it matters in an audit or review
A gain from an acquisition is a red flag for missed liabilities or overstated asset values. Auditors challenge the valuation, probe why the seller accepted less, and verify disclosures of the reasons for the gain.
Example
(Illustrative) A buyer pays $2.0 million for net assets with a fair value of $2.6 million.
Dr Net identifiable assets (various) 2,600,000 Cr Cash 2,000,000 Cr Gain on bargain purchase 600,000
Common mistakes
- Booking a gain without a documented reassessment.
- Omitting the explanation of the gain in the notes.
Sources
- FASB ASC 805-30-25, Business Combinations, Goodwill or a Gain from a Bargain Purchase, Recognition
- FASB ASC 805-30-50, disclosures for a bargain purchase
- FASB ASC 820, Fair Value Measurement
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error