Measuring goodwill or a gain from a bargain purchase

Measuring goodwill or a gain from a bargain purchase – Applying IFRS 3’s formula may result in a positive amount (goodwill) or a negative amount (gain from a bargain purchase). These amounts are accounted for differently.

Measuring goodwill or a gain from a bargain purchase

A gain from a bargain purchase is expected to arise relatively infrequently and can normally be attributed to specific commercial factors such as a forced sale by the vendors. Before recognising a bargain purchase gain, IFRS 3 specifically requires the acquirer to review:

  • whether all of the assets acquired and liabilities assumed have been identified; and
  • the related accounting measurements. Measuring goodwill or a gain from a bargain purchase

The amount of goodwill or gain from a bargain purchase to be recognized in conjunction with a business combination is determined as follows:

Consideration transferred (measured predominantly at fair value)

+

Acquisition-date fair value of any NCI (in the case of a partial acquisition)

+

Acquisition-date fair value of the buyer’s previously held equity interest in the target (in the case of a step acquisition)

=

Total (i.e., fair value of the target as a whole)

+

Net assets acquired by the buyer (which is 100 percent of the target’s net assets measured predominantly at fair value)

=

Goodwill (if positive); Gain from a bargain purchase (if negative)

The sum of the first three elements can also be thought of as the fair value of the target as a whole and the amount of goodwill can also be thought of as the excess of the fair value of the target as a whole over the net assets acquired by the buyer (which is 100 percent of the target’s net assets measured predominantly at fair value).

This approach to determining goodwill results in the recognition of 100 percent of goodwill, not just the buyer’s portion of goodwill. Recognizing 100 percent of goodwill results from: (a) including in the fair value of the target as a whole both the fair value of any NCI and the fair value of any previously held equity interest of the buyer and (b) recognizing 100 percent of the fair value (or other measured amount) of the net assets acquired by the buyer. Measuring goodwill or a gain from a bargain purchase

Measuring the acquisition-date fair value of the acquirer’s interest in the acquiree using valuation techniques

In a business combination achieved without the transfer of consideration, the acquirer must substitute the acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the consideration transferred to measure goodwill or a gain on a bargain purchase. The fair value is measured using valuation techniques for example discounted cash flow methods.

Example

Company A acquired 95% of shares in company B for EUR 2,000,000, payable by wire transfer at the date of signing the agreement. Fair value of non-controlling interests is EUR 240,000. The value of acquired net assets measured in accordance with IFRS 3 is EUR 2,300,000. How should goodwill be calculated and recognized by the acquirer?

a) accounting entries and the value of the goodwill if non-controlling interests are measured at the fair value (Amounts in EUR).

Fair value of the purchase consideration Measuring goodwill or a gain from a bargain purchase

2,000,000

Fair value of non-controlling interests Measuring goodwill or a gain from a bargain purchase

240,000

Total

2,240,000

Fair value of net assets Measuring goodwill or a gain from a bargain purchase

-2,300,000

Gain on purchase Measuring goodwill or a gain from a bargain purchase

-60,000

Accounting entries should be as follows (Amounts in EUR): Measuring goodwill or a gain from a bargain purchase

B/S Net assets

2,300,000

B/S Cash

2,000,000

B/S Non-controlling interest

240,000

PNL Gain on bargain purchase

60,000

b) accounting entries and the value of the goodwill if non-controlling interests are measured by proportional share (Amounts in EUR).

Fair value of the purchase consideration Measuring goodwill or a gain from a bargain purchase

2,000,000

Value of non-controlling interests (2,300,000 x 0.05) Measuring goodwill or a gain from a bargain purchase

115,000

Total

2,115,000

Fair value of net assets Measuring goodwill or a gain from a bargain purchase

-2,300,000

Gain on purchase Measuring goodwill or a gain from a bargain purchase

-185,000

Accounting entries should be as follows (Amounts in EUR):

B/S Net assets

2,300,000

B/S Cash

2,000,000

B/S Non-controlling interest

115,000

PNL Gain on bargain purchase

185,000

See also: The IFRS Foundation

Measuring goodwill or a gain from a bargain purchase