What is a bargain purchase in an acquisition?
A bargain purchase in an acquisition occurs when a company acquires an asset or a business for less than its fair value. In such cases, the company is required to recognize the difference between the fair value of the asset or business and the purchase price as a gain in its income statement.
Accounting for bargain purchases is a financial reporting concept that occurs when a company acquires an asset or a business for less than its fair value. In such cases, the company is required to recognize the difference between the fair value of the asset or business and the purchase price as a gain in its income statement. This gain is commonly referred to as a "bargain purchase gain."
Definition and Governance of Bargain Purchases
The accounting for bargain purchases is governed by the Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) 805, Business Combinations. According to this guidance, a bargain purchase occurs when the fair value of the net assets of the acquired company exceeds the purchase price. The excess is recorded as a gain in the income statement in the period in which the acquisition takes place.
Calculation and Recognition of Bargain Purchase Gains
For example, suppose a company acquires a business for $10 million, and the fair value of the net assets of the acquired business is determined to be $12 million. In this case, the company would recognize a gain of $2 million in its income statement, which would be reported as "Bargain purchase gain" in the income statement.
Differences between Bargain Purchase Gains and Gain from Sale of Assets
It is important to note that the gain recognized from a bargain purchase is not the same as a gain from a sale of assets. A gain from the sale of assets is recognized when an asset is sold for more than its carrying value on the balance sheet. A bargain purchase gain, on the other hand, is recognized when an asset or a business is acquired for less than its fair value.
The accounting for bargain purchases also affects the calculation of goodwill. Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the net assets of the acquired company. When a bargain purchase occurs, the calculation of goodwill is affected because the fair value of the net assets is greater than the purchase price. In such cases, the amount of goodwill recognized is less than the purchase price, which is called negative goodwill.
In summary, accounting for bargain purchases is a financial reporting concept that occurs when a company acquires an asset or a business for less than its fair value. The difference between the fair value of the asset or business and the purchase price is recognized as a gain in the income statement. This gain is commonly referred to as a "bargain purchase gain." The accounting for bargain purchases is governed by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations and it affects the calculation of goodwill.
Conclusion
In conclusion, understanding and accounting for bargain purchases is important for companies as it can have a significant impact on their financial statements. It is important for companies to carefully evaluate the fair value of the assets and businesses they acquire to ensure that they are accounting for bargain purchases correctly. Additionally, management should consider the implications of bargain purchases on goodwill and any other areas of the financial statements that may be affected
