Bargain Purchase Gain

In most acquisitions, the buyer pays more than the fair value of the target's identifiable assets and liabilities, recording the difference as goodwill. Occasionally, the buyer pays less. Under IFRS and US GAAP, the difference is recognised immediately as a gain in profit.

For example, a company buys a struggling business for 80,000,000, and the fair value of its identifiable net assets is 100,000,000. The buyer records a bargain purchase gain of 20,000,000.

Bargain purchases can arise when sellers are forced to sell quickly, such as in financial distress, insolvency or regulatory pressure, or when the business is expected to require costly restructuring.

Because bargain purchases are unusual, accounting standards require the buyer to reassess its fair value measurements carefully before recognising a gain, to make sure it has identified all assets and liabilities correctly. Investors often treat bargain purchase gains as one-time items, excluding them when assessing underlying performance.