Bargain Purchase

In a business combination, bargain purchase occurs when the fair value of net assets of the acquiree exceeds the purchase consideration paid by the acquirer plus fair value of any noncontrolling interest. The difference is recognized as a gain by the acquirer. It is also called negative goodwill.

When one company acquires another, it pays the company or its shareholders an amount referred to as purchase consideration. It is either cash or stock or it can be any other asset. In return the acquirer gets net assets of the acquiree or stock of the acquiree representing his control. In most cases, the consideration paid by the acquirer is more than the fair value of the net assets. It is because not all assets appear in the books of accounts, but there are certain other characteristics of the business such as its customer satisfaction, brand value, repute, synergy, culture, etc. which cause the fair value of the business to be higher than the fair value of its net assets. A bargain purchase is exactly opposite. In case of a bargain purchase, the fair value of individual assets is higher than the combined worth of the business as measured by the amount paid to acquire it. One situation in which it might be the case when the business combination is a forced sell.

IFRS 3 and ASC 805 contain the accounting guidance that apply to a bargain purchase. Before recognition of any income associated with bargain purchase, accounting standards require us to make sure no assets are unaccounted for.


Your company has 15% holding in Company B, 80% of which is held by Company B and 5% by a number of other investors. Company C has a suffered a major regulatory set up and must liquidate their holding in Company B quickly. You know it is hard for Company C to find a buyer on such short notice, so you offer to purchase 80% holding for $560 million. If the fair value of net assets is $740 million and the fair value of the 5% stake of miscellaneous investors is worth $30 million, work out if any goodwill arises on the acquisition. Goodwill is worked out using the following formula:

Fair value of equity already held (0.15 × $560/0.8) E $105 million
Fair value of consideration paid C $560 million
Fair value of non-controlling interest N $30 million
Fair value of total consideration T = E + C + N $695 million
Less: fair value of net assets A ($740 million)
Goodwill G = T - A ($45 million)

We have a negative goodwill value which means that the fair value of net assets exceeded the fair value of total consideration by $45 million. Your company should recognize the negative goodwill using the following journal entry:

Account Dr Cr
Net assets $635 million
Cash $560 million
Non-controlling interest $30 million
Gain on bargain purchase $45 million

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