Pros And Cons Of Bargain Purchase

914 Words4 Pages
Bargain purchase A bargain purchase consists of financial assets acquired for less than fair market value. In a bargain purchase business combination, a corporate entity is acquired by another for an amount that is less than the fair market value of its net assets. Bargain purchase arises when the price paid for the fair value of the equity shares of the investee is less than the fair value of the net asset of the investee on the acquisition date. In a situation where the investor acquire 100 percent interest in the investee and if the consideration transferred is less than the fair value of the identifiable assets, liabilities and contingent liabilities of the investee on the date of business combination, there is a bargain purchase.…show more content…
A bargain purchase is recognized as a gain as of the acquisition date. Goodwill Often a purchaser will pay more to acquire a subsidiary than the fair value of the net assets acquired. The market value of the acquired is often more than the value of its net assets. Also, an acquirer may see future cost savings by combining the companies, so it’s willing to pay extra. This difference between the purchase price paid to acquire a subsidiary, and the fair value of the net assets acquired is called purchased goodwill, or just ‘goodwill’. To calculate goodwill, simply subtract the purchase price from the net assets acquired. Purchased goodwill is an intangible asset, which appears in the consolidated statement of financial position. You might know already that internally generated goodwill cannot appear as an intangible asset in the statement of financial position, so why are we allowed to include purchased goodwill. Well simply, it’s reliably measurable. A purchaser actually paid extra to acquire the assets, which has given us a reliable figure for the goodwill. Internally generated goodwill has no reliable measurement, so it has to be left out. The initial cost of the goodwill is measured at the date of the acquisition of the subsidiary. Goodwill…show more content…
Can we include the directly attributable acquisition costs, like legal and accountants fees when working out the cost of acquisition? No. You can do this for things like plant and equipment measured at cost, but not for business combinations. You might read in some older textbooks that you can, and it was allowed until 2008 when IFRS 3 was revised. But since IFRS 3 was revised, all costs relating to the acquisition of a subsidiary must be expensed to the P&L in the period of acquisition. The result of this is that purchased goodwill will exclude these directly attributable costs of

More about Pros And Cons Of Bargain Purchase

Open Document