Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Bargain Purchase

What it is:

Also called negative goodwill, a bargain purchase occurs when a company buys an asset for less than its fair market value. Negative goodwill is the opposite of goodwill.

How it works (Example):

For example, let’s assume Company XYZ purchases the assets of Company ABC for $20 million. The assets are actually worth $35 million, but Company XYZ gets a deal because Company ABC needs cash immediately and Company XYZ is the only buyer willing to pay cash for the assets. The difference between the purchase price and the fair market value is $15 million.

Company XYZ records this as a bargain purchase or negative goodwill on its income statement. It does not record the whole $15 million at once, however; it records the bargain purchase amount over the remaining weighted-average estimated useful life of the acquired assets on the income statement. The remainder stays on the balance sheet as a contra asset and eventually dwindles down to zero as the assets age.

After the acquisition is complete, Company XYZ must test the fair values of the acquired assets for impairment. In cases where a company is acquiring future losses and expenses, the bargain purchase amount is deferred and recognized on the income statement as those future losses or expenses occur.

Why it Matters:

When a company pays more than fair market value for an asset, it records the overage as an intangible asset on its balance sheet. But a bargain purchase is the opposite of this, and the difference is recorded as an extraordinary gain on the buyer’s income statement. Bargain purchases are often a sign that an asset was sold in a distressed situation.