Week 009

MEASUREMENT OF GOODWILL OR GAIN FROM

A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION

PART 1
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Learning objectives

At the end of this module, the students will learn the following:

• Measuring Goodwill
• Measuring a bargain purchase gain
• Measuring the consideration transferred
• Acquisition-Related costs
• Acquirer’s equity securities issued as consideration
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Measuring Goodwill
• The ASC master glossary defines goodwill as “an asset representing the future
economic benefits arising from other assets acquired in a business combination or
an acquisition by a not-for-profit entity that are not individually identified and
separately recognized.” Because goodwill is not a separately identifiable asset, it
cannot be measured directly. It is therefore measured as a residual and calculated
as the excess of the sum of (1) the consideration transferred, (2) the fair value of
any noncontrolling interest in the acquiree, and (3) the fair value of the acquirer’s
previously held equity interest in the acquiree over the net of the acquisition-date
values of the identifiable assets acquired and the liabilities assumed.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

• Once recognized, goodwill is tested for impairment in accordance with ASC 350-20,
which also provides an accounting alternative for the subsequent accounting for
goodwill for entities that do not meet the definition of a PBE or are not-for-profit
entities. Such entities may elect to amortize goodwill acquired in a business
combination and to use a simplified, one-step impairment test. See Module 8 for
more information about accounting alternatives available to private companies and
not-for-profit entities.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Measuring a Bargain Purchase Gain

• Bargain purchases could result from what might be viewed as market

imperfections, including situations in which the seller may not have had adequate
time to market the business and thus did not subject the sale to a competitive
bidding process, or in which the seller was compelled to sell, such as in a forced
liquidation or distressed sale. However, because it is expected that a seller would
not accept less than fair value for its business and that additional potential buyers
also would emerge to take advantage of a potential bargain and thus increase the
price, bargain purchases resulting from underpayments relative to fair value do not
occur frequently.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

• Recognition of a Provisional Bargain Purchase Gain During the Measurement Period

• As part of the initial accounting for a business combination, an acquirer may
initially calculate a bargain purchase gain but may still be waiting for additional
information to finalize the accounting for the business combination. In situations
in which that information does not become available before the end of the
reporting period, some have questioned whether the acquirer should recognize a
“provisional bargain purchase gain” or whether it should defer recognition of any
gain until the accounting for the business combination is complete.
• Accounting for Income Taxes in a Business Combination That Resulted in a Bargain
Purchase
• This recognized gain increases the acquirer’s investment in the acquiree and
causes a corresponding increase in the acquiree’s equity for financial reporting
purposes. . However, for tax purposes, the bargain purchase gain is generally not
included in the tax basis of the investment in the acquiree.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Measuring the Consideration Transferred

• The consideration transferred by the acquirer to the seller is commonly in the form of
cash, equity instruments of the acquirer, or a combination of both. However, it can take
many other forms, including liabilities incurred to the seller (e.g., contingent
consideration or a seller note). The consideration transferred in a business
combination is measured at fair value as of the acquisition date, which is consistent
with the fair value measurement and recognition principles of ASC 805, with one
exception: share-based payment awards are calculated by using a fair-value-based
measure in accordance with ASC 718.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

• Consideration Held in Escrow Pending Resolution of Representation and Warranty

Provisions
• Acquisition agreements may require that a specified portion of the consideration be
held in escrow pending resolution of the agreement’s general representation and
warranty provisions. If such consideration is in the form of shares or other securities,
the arrangement typically stipulates that the risks and rewards of ownership are
transferred to the seller.
• Working Capital Adjustments
• Acquisition agreements may include provisions that adjust the consideration
transferred for excesses or shortfalls in the stipulated amount of working capital as of
the acquisition date as defined by the parties to the combination. Such provisions
establish the amount of working capital that should exist as of the acquisition date.
• Ticking Fees
• Some acquisition agreements include a provision stipulating that the amount paid by
the acquirer is increased if the transaction closes after a specified date.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Acquisition-Related Costs

• Acquisition-related costs are costs the acquirer incurs to effect a business

combination. Those costs include finder’s fees; advisory, legal, accounting, valuation,
and other professional or consulting fees; general administrative costs, including the
costs of maintaining an internal acquisitions department; and costs of registering and
issuing debt and equity securities. The acquirer shall account for acquisition-related
costs as expenses in the periods in which the costs are incurred and the services are
received, with one exception. The costs to issue debt or equity securities shall be
recognized in accordance with other applicable GAAP.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

Acquirer’s Equity Securities Issued as Consideration

• If the acquirer issues its equity securities (e.g., common or preferred shares, options,
or warrants) as consideration in the business combination, it measures the equity
securities at fair value as of the acquisition date by applying ASC 820. If its equity
instruments are publicly traded, the acquirer determines the fair value on the basis of
quoted market prices. If the shares are not publicly traded, the acquirer must use
other valuation techniques to measure the fair value the equity instruments.
Week 009: MEASUREMENT OF GOODWILL OR GAIN FROM A BARGAIN PURCHASE, AND CONSIDERATION
TRANSFERRED IN A BUSINESS COMBINATION PART 1

References and Supplementary Materials

Book and Journals

Deloitte’s A Roadmap to Accounting for Business Combinations
Authors: Michael Morrissey and Stefanie Tamulis
Contributors: Ashley Carpenter, Sandie Kim, Christine Mazor, Stephen
McKinney, Morgan Miles, Lisa Mitrovich, Ignacio Perez, Michael Scheper,
Jonathan Tambourine, Curt Weller, Amy Winkler, and Andy Winters, Lynne
Campbell, Diane Castro, Geri Driscoll, and Jeanine Pagliaro