A bargain purchase results when the fair value of the assets acquired exceeds the purchase price. If a transaction is determined to be bargain purchase, the acquirer must recognize a gain on its income statement.
The volatility of the commercial banking industry during the financial crisis resulted in a number of banks recognizing bargain purchase gains as they acquired distressed banks. Indeed, as industries undergo cyclical changes and consolidation trends, the likelihood of strategic buyers recognizing a bargain purchase gain increases.
Bargain purchases can be the result of a distressed seller or the lack of recognition of a contingent liability. Bargain purchases can also result when an earnout was part of the purchase consideration, but sufficient information is not available in order to recognize a contingent liability, thus leading to a disconnect between purchase accounting and the economic reality of a transaction.
In order to determine whether or not a transaction can be categorized as a bargain purchase, the original valuation and identification of identifiable assets and liabilities (including intangibles) must be reassessed.
ASC 805-30-30-5 states that the required reassessment should include a review of all of the following:
- The identifiable assets acquired and liabilities assumed
- The noncontrolling interest in the acquiree, if any
- For a business combination achieved in stages, the acquirer’s previously held interest in the acquiree
- The consideration transferred
Reviewing the methodologies and assumptions used in the initial purchase price allocation to value intangible assets and contingent liabilities is a crucial step in determining whether or not a transaction meets the criteria to be categorized as a bargain purchase. The valuation of such assets and liabilities must reflect all available information at the acquisition date.
Mercer Capital has performed purchase price allocations for clients across a variety of industries and transaction structures, including those giving rise to bargain purchases. Please contact us to discuss how Mercer Capital can help with the business combination accounting process and the valuation of intangible assets and contingent liabilities.