Bargain purchase
M&A / Merger ModelAn acquisition where the fair value of identifiable net assets exceeds the price paid, producing an immediate gain rather than goodwill.
Also written: negative goodwill, bargain purchase gain
Run the allocation and the residual normally comes out positive, which is goodwill. Occasionally it comes out negative, meaning the buyer acquired identifiable net assets worth more than it paid. IFRS 3 calls that a bargain purchase and US GAAP treats it the same way.
The standard does not let the acquirer book the gain and move on. It requires a reassessment first, because an apparent bargain is far more often a liability that was missed or an asset that was valued too generously than a genuinely cheap company. Only if the excess survives that review is it recognised.
When it is recognised it goes straight to profit or loss at completion. It is not held on the balance sheet as negative goodwill and it is not amortised, which is the answer most candidates get wrong because the old accounting did exactly that.
Genuine cases have a pattern: forced sellers, insolvency processes, regulator mandated divestitures and carve outs that few buyers are equipped to run. Analysts strip the gain out of earnings immediately, because a one off non cash credit tells you nothing about what the combined business earns.
Worked example
Identifiable net assets at fair value come to 587.5 and the buyer paid 520 in a distressed process.
The review confirms no liability was missed, so a gain of 67.5 is recognised in profit or loss at completion rather than any goodwill being recorded.
Reported net income that year is 67.5 higher for a reason that will never repeat, which is why every analyst removes it before valuing the acquirer.