Bargain purchases and the reassessment step

• Identify when the goodwill equation produces a bargain purchase
• Perform the reassessment required by 805-30-25-4
• Record the gain and attribute it to the acquirer
• Prepare the disclosures for a bargain purchase

When it happens

A bargain purchase occurs when the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the fair value of any noncontrolling interest, and the fair value of any previously held equity interest. In other words, the goodwill equation in 805-30-30-1 gives a negative number.

805-30-25-3 gives the reasons this can be real: a forced sale where the seller is acting under compulsion, a distressed seller who needs cash quickly, or measurement exceptions in Topic 805 that require certain items to be recognized at amounts that are not fair value. Deferred tax assets, for example, are measured under Topic 740, not at fair value.

Bargain purchases are rare. A gain in an arm's-length deal between informed parties is more often a sign of a measurement error than of a bargain.

The required reassessment

Before recognizing any gain, 805-30-25-4 requires the acquirer to reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed, and to recognize any additional assets or liabilities identified in that review. The acquirer then reviews the procedures used to measure each of these amounts:

• the identifiable assets acquired and liabilities assumed
• the noncontrolling interest in the acquiree, if any
• the acquirer's previously held equity interest, if any
• the consideration transferred

The objective is to make sure the measurements reflect all available information at the acquisition date. In practice, the review usually asks:

• Are there contingent liabilities, environmental obligations, unfavorable contracts or litigation that were missed?
• Are inventory and fixed asset values consistent with the price paid and with a market participant's view?
• Was the noncontrolling interest valued with an appropriate discount for lack of control?
• Was contingent consideration recognized?
• Are deferred tax liabilities on the step-ups recorded?

Document the reassessment. An auditor will expect to see it, and a gain without one is a red flag.

Recording the gain

If an excess remains after the reassessment, the acquirer recognizes it in earnings on the acquisition date as a gain attributable to the acquirer (805-30-25-2). The noncontrolling interest does not share in the gain, because it was measured at its own fair value.

The gain is not deferred and is not shown as negative goodwill. It is not an extraordinary item; that classification was eliminated from US GAAP by ASU 2015-01.

Private company angle

A private company that elects ASU 2014-18 subsumes some customer-related intangibles and noncompete agreements into goodwill. In a deal near the bargain line, fewer separately recognized intangibles reduces the identifiable net assets, which can turn a small gain into a small amount of goodwill.

Pushdown and bargain purchases

If the acquiree applies pushdown accounting, the acquirer's bargain purchase gain is not recognized in the acquiree's income statement. The acquiree records it as an adjustment to additional paid-in capital under 805-50-30-11. See the pushdown accounting lesson.

Disclosures

Subtopic 805-30 requires, for a bargain purchase:

• the amount of any gain recognized and the line item in the income statement where it is recognized
• a description of the reasons why the transaction resulted in a gain

The disclosure that the seller was under financial pressure, or that the business was sold in a court-supervised process, is often the most persuasive evidence that the gain is real.

Tools

The goodwill and bargain purchase calculator runs the 805-30-30-1 equation and flags a negative result for reassessment.

An 80 percent acquisition from a distressed seller