Chapter 5 — Measurement of Goodwill or Gain From a Bargain Purchase, and Consideration Transferred in a Business Combination

5.2 Measuring a Bargain Purchase Gain

ASC 805-30

25-2 Occasionally, an acquirer will make a bargain purchase, which is a business combination in which the amount in paragraph 805-30-30-1(b) exceeds the aggregate of the amounts specified in (a) in that paragraph. If that excess remains after applying the requirements in paragraph 805-30-25-4, the acquirer shall recognize the resulting gain in earnings on the acquisition date. The gain shall be attributed to the acquirer. Example 1 (see paragraph 805-30-55-14) provides an illustration of this guidance.

25-3 A bargain purchase might happen, for example, in a business combination that is a forced sale in which the seller is acting under compulsion. However, the recognition or measurement exceptions for particular items identified in paragraphs 805-20-25-16, and 805-20-30-10 also may result in recognizing a gain (or change the amount of a recognized gain) on a bargain purchase.

Bargain purchases are expected to be infrequent and should not result from recognition or measurement errors since ASC 805-30 requires the acquirer to reassess both recognition and measurement before recognizing a bargain purchase gain. ASC 805-30-25-4 and ASC 805-30-30-5 and 30-6 state the following:

ASC 805-30

25-4 Before recognizing a gain on a bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed and shall recognize any additional assets or liabilities that are identified in that review. See paragraphs 805-30-30-4 through 30-6 for guidance on the review of measurement procedures in connection with a reassessment required by this paragraph.

30-5 Paragraph 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 before recognizing a gain on a bargain purchase. As part of that required reassessment, the acquirer shall then review the procedures used to measure the amounts this Topic requires to be recognized at the acquisition date for all of the following:

The identifiable assets acquired and liabilities assumed
The noncontrolling interest in the acquiree, if any
For a business combination achieved in stages, the acquirer’s previously held equity interest in the acquiree
The consideration transferred.

30-6 The objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date.

Bargain purchases could result from what might be viewed as market imperfections, including situations in which the seller may not have had adequate time to market the business and thus did not subject the sale to a competitive bidding process, or in which the seller was compelled to sell, such as in a forced liquidation or distressed sale. However, because it is expected that a seller would not accept less than fair value for its business and that additional potential buyers also would emerge to take advantage of a potential bargain and thus increase the price, bargain purchases resulting from underpayments relative to fair value do not occur frequently.

More commonly, bargain purchase gains occur because not all assets acquired or liabilities assumed are recognized or measured at their fair values. For example, an acquirer would be expected to pay less for a business that has a contingent liability associated with it, but that liability may go unrecognized when the business combination is accounted for if the liability does not meet the recognition criteria in ASC 805. The risk related to that liability would be reflected in what the acquirer paid for the acquiree, resulting in a mismatch between the consideration transferred and the net assets recognized. That mismatch could lead to the recognition of a bargain purchase gain.

If, even after reassessing both recognition and measurement, the acquirer continues to calculate a bargain purchase, the acquirer recognizes the gain in earnings. If a gain is recognized from a bargain purchase, the acquirer cannot also recognize goodwill from that acquisition because there can be only one residual amount calculated. In addition, ASC 805-30-25-2 states that if the acquirer obtains a controlling but less than a 100 percent interest in the acquiree in a partial acquisition, the gain must be attributed to the acquirer.

Under ASC 805-30-50-1(f), the acquirer must disclose the amount of the gain, the line item in which the gain is recognized, and a description of why the acquisition resulted in a gain (e.g., why the acquirer was able to acquire a business for less than its fair value or whether the gain was a result of the recognition or measurement of items at amounts other than their fair values). See Section 7.5 for more information.

ASC 805-30-55-14 through 55-16 provide an example of how to account for a bargain purchase:

ASC 805-30

Example 1: Bargain Purchases

55-14 Paragraphs 805-30-25-2 through 25-4 establish the required accounting for a bargain purchase. This Example provides additional guidance on bargain purchases and illustrates its application.

55-15 On January 1, 20X5, the acquiring entity, or Acquirer, acquires 80 percent of the equity interests of the acquiree, or Target, a private entity, in exchange for cash of $150. Because the former owners of Target needed to dispose of their investments in Target by a specified date, they did not have sufficient time to market Target to multiple potential buyers. The management of Acquirer initially measures the separately recognizable identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with the requirements of the Business Combinations Topic. The identifiable assets are measured at $250, and the liabilities assumed are measured at $50. Acquirer engages an independent consultant who determines that the fair value of the 20 percent noncontrolling interest in Target is $42. The amount of Target’s identifiable net assets ($200, calculated as $250 – $50) exceeds the fair value of the consideration transferred plus the fair value of the noncontrolling interest in Target. Therefore, Acquirer reviews the procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair value of both the noncontrolling interest in Target and the consideration transferred. After that review, Acquirer decides that the procedures and resulting measures were appropriate. Acquirer measures the gain on its purchase of the 80 percent interest as follows.

55-16 Acquirer would record its acquisition of Target in its consolidated financial statements as follows.

5.2.1 Recognition of a Provisional Bargain Purchase Gain During the Measurement Period

As part of the initial accounting for a business combination, an acquirer may initially calculate a bargain purchase gain but may still be waiting for additional information to finalize the accounting for the business combination. In situations in which that information does not become available before the end of the reporting period, some have questioned whether the acquirer should recognize a “provisional bargain purchase gain” or whether it should defer recognition of any gain (i.e., recognize a provisional deferred credit) until the accounting for the business combination is complete.

Some have looked to the guidance in ASC 805-10-25-13 as support for recognizing a provisional bargain purchase gain in earnings of the reporting period. That guidance states that “[i]f the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete.” Others have looked to the guidance in ASC 805-30-25-4 and ASC 805-30-30-5 as support for recognizing a deferred credit (i.e., a liability) rather than a provisional bargain purchase gain until the accounting for the acquisition is complete (i.e., the end of the measurement period). That guidance requires an acquirer to reassess whether it has correctly identified and measured all of the assets acquired and liabilities assumed before recognizing a gain.

We believe that either approach is acceptable. Entities should disclose (1) that the initial accounting is still provisional and the gain or deferred credit recognized may therefore be subject to future adjustments and (2) the amount of the gain or deferred credit, the line item in which it is recognized, and a description of why the acquisition may result in a gain in accordance with ASC 805-30-50-1(f). The acquirer should also provide the other disclosures required by ASC 805-20-50-4A when the initial accounting for a business combination is incomplete (see Section 7.11).

Some have suggested that a provisional gain should be recognized as a contra-asset if the acquirer believes that the gain may be related to the overstatement of a specific asset or assets, such as identifiable intangible assets, which would be confirmed once the valuations are complete. However, we believe that such an approach suggests that the acquirer’s estimates of fair value may not be appropriate, even provisionally.

5.2.2 Accounting for Income Taxes in a Business Combination That Resulted in a Bargain Purchase

The acquirer calculates the gain on the bargain purchase after the deferred taxes on the inside basis differences are recorded on the acquiree’s assets and liabilities. This recognized gain increases the acquirer’s investment in the acquiree and causes a corresponding increase in the acquiree’s equity for financial reporting purposes. However, for tax purposes, the bargain purchase gain is generally not included in the tax basis of the investment in the acquiree. Therefore, a difference arises between the investment in the acquiree for financial reporting purposes and the investment in the acquiree for tax purposes. If deferred taxes are recorded on the outside basis difference caused by the bargain purchase gain, the tax effects would be recorded outside the business combination as a component of income tax expense. See Deloitte’s Roadmap Income Taxes for more information.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.