Bargain Purchase

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.