Acquisition Accounting Bargain Purchase

This presentation we’re going to continue on with our discussion of acquisition accounting, and this time focusing in on a bargain purchase, get ready to account with advanced financial accounting. First off, we can basically think of the bargain purchase as the opposite of goodwill. So in a prior presentation, we talked about the concept of goodwill within an acquisition, which would be resulting if the fair market value of the amount that was given like basically the purchasing price was greater than the fair market value of the net assets. So in other words, we take we look at the books of the company that’s being acquired, we’ve revalue their assets and liabilities to be on a fair market value, then assets minus liabilities, the equity section, the net assets now at a fair market value, we take a look at that. And if there’s a consideration that’s given that is greater than that amount, that then would result in goodwill. Now goodwill is quite common, because it’s unlikely even if you even if you re assess all the assets and liabilities to their fair value. Then you would typically think that the price would either be that that would be given the the amount that would be exchanged, the fair market value of the consideration would be the same as the assets minus the liabilities at fair market value, or more, because there’s some type of goodwill, that’s going to be that’s going to be in the organization. Now, you might be thinking, Well, what what if it was the opposite? What if you took the fair market value of the net assets, and the amount that was given the exchange amount was less than the fair market value? Now that could happen, but just note that that’s a lot more unusual.


So you want to be aware of it, it could happen, that’s going to be the bargain purchase we’re going to be talking about here, but just realize it’s a lot less likely to happen because you would think that something weird has to be going on for that to be the case, right? Because, I mean, if we were to take the balance sheet of a company, their assets and their minus and minus their liabilities and get the net assets after we revalued all their assets and their liabilities to the fair value, then you would think just to purchase the assets minus the liability He’s not even any any other intangible or whatnot, would be, would be at whatever whatever value it would be right? You say assets minus liabilities at the fair value, you would think that that would be the minimum or baseline price that you would be paying for the company. So if you’re saying that the assets minus the liabilities at fair value is so much and we’re gonna pay less than that, then there’s the US got to be you would think there’s got to be some other kind of thing happening here. Either the company needs to go out of business quickly, there’s a time constraint happening or something going on, for typically that to be the case. So first off, goodwill, quite common. The bargain purchase, you know, you think less common, and you’d probably think, well, what why exactly would that happen? There must be something else that would be going on to be paid less than, than basically the fair value after revaluing the assets minus the liabilities. So let’s get into it bargain purchase, when the fair value of the content of the consideration given the amount that can be given in the exchange. As well as the fair value of any equity interest in the acquire II already held and the fair value of any non controlling interest in the inquiry is less than the fair value of the acquires net identifiable assets, that’s when you’re going to have the bargain purchase.



So then the acquire II should make sure that all acquisition date valuations are valued appropriately. So again, if that happens, then you’re gonna say, Okay, well, did I really value all the all the, all the valuations correctly, because you want to just basically double check the numbers because it would look a little bit unusual, as we discussed, so you want to think okay, maybe I, maybe I didn’t value the assets and liabilities correctly. And maybe that’s the reason that the the amount of consideration given is less less than the net assets, the acquirer must recognize a gain at the date of acquisition. And you can think of this in terms of journal entry kind of components. Do you think about this as basically a purchase that’s happening? You can say, all right, well, the assets that are going to go on the books are going to be you can think of as basically debit the net assets, and then you’re going to be crediting the consideration. Let’s say it was cash if if this was going to be a purchase, that the net assets are getting are less than the credit to cash, so you’re going to need another credit. And that’s going to be the gain, right? So you can think of it kind of like the plug of the journal entry, it being recognized as a game. Whereas if you had goodwill, then and you think about that as basically a sales transaction, then you’re going to say, all right, well, the add the net assets that are going on the books are debited, and they’re greater than the contracts consideration, which would be cash or whatever was given, right, and that would, that would result in another debit that would be needed. And so the debit is going to be an asset that you’re going to put on the books in that case, which would be the goodwill. So we’ll we’ll take a look at some transactions, hopefully, in a future presentation.



So you could see kind of the journal entries that helps me to kind of think this thing out. So, the basically way you want to see this is you got the fair market value given this is the general rule, the fair market value that is going to be given basically consideration and exchange and kind of like a purchase type of process when this acquisition takes place if that’s greater than the net assets, meaning you had to take the balance sheet revalue the balance sheet the assets and the liabilities to get the net assets, which is like the equity section on the fair market value, we’re taking the net assets means basically the equity, but not on a book basis now on the on the fair value basis. So, if the consideration given is greater than the net assets, which is typically the case, then you’re going to have that goodwill situation. However, you want to be aware that it is possible for the fair market value given to be less than the fair market value of the net assets, not always not generally the case. And if that is that does happen. You want to make sure that you did revalue the net assets correctly and see that and just double check that situation. And then if this is the result, then then you got that bargain purchase the goodwill this scenario up top results in an asset intangible asset at the point of the acquisition, the bargain purchase results in business Great game that needs to be recognized in that point.

Leave a Reply

Your email address will not be published. Required fields are marked *