What is a bargain purchase and how is it accounted for?
A bargain purchase (negative goodwill / a 'lucky buy'): an acquisition at a price BELOW the fair value of the net assets acquired. Rare — typical in distressed M&A, forced sales, or an incomplete auction. IFRS 3 treatment:
- Reassessment test: auditors / valuers must check that all acquired net assets were measured correctly at fair value and that all liabilities were captured.
- If, after reassessment, there is still negative goodwill → recognize it IMMEDIATELY as income in the P&L ('gain from a bargain purchase').
NOT as a negative balance-sheet item.
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Specialty Chemicals Co acquires a distressed competitor for 50; fair value of net assets is 70 → a bargain purchase gain of 20 in the P&L in the acquisition quarter.
(a) reported net income is artificially inflated by the bargain-purchase gain → adjust it out as a 'one-time effect' in DD. (b) Cash effect: 0 (purely a balance-sheet measurement effect). (c) Future drag: higher asset carrying values → higher D&A in later years. In practice: rare in normal M&A, more common in bank restructurings (BNP Paribas-Fortis 2009) and forced sales under capital-market stress.
'A bargain-purchase gain in distressed M&A is reported as a one-time EBIT boost — eliminate it from adjusted EBITDA for a run-rate comparison'.