Bargain Purchase in Finance

What Is a Bargain Purchase?

A bargain purchase includes assets acquired for less than fair market value. In a bargain purchase business combination, a corporate entity is acquired by one more for an amount that is not exactly the fair market value of its net assets. Current accounting rules for business combinations require the acquirer to record the difference between the fair value of the acquired net assets and the purchase price as a gain on its income statement due to negative goodwill.

How a Bargain Purchase Works

In the outcome of the 2008 market crash, the tremendous number of financial companies that were trading at huge discounts to their book value introduced a phenomenal opportunity for bargain purchases. Firms that had the option to exploit these distressed priced companies and assets had the option to add to their asset base at generally little cost.

Bargain purchases frequently happen when a liquidity crunch is occurring. That is, businesses and assets are sold for not exactly the fair market value during a liquidity crunch. Generally, during a liquidity crunch, these things should be sold rapidly, subsequently they must be offered at a discounted cost.

Special Considerations

While accounting for a bargain purchase, the assets and liabilities of the potential business being acquired are recorded at fair value. Then, at that point, all assets and liabilities are examined to guarantee they have been appropriately represented. The fair value of the asset or thing being purchased is recorded. The difference between the fair value and what's paid is recorded as a gain.

For instance, on the off chance that company ABC needs to sell its business to pay taxes, they might consent to a below fair market value price. They consent to sell a half interest in the company for $250,000. In the wake of computing the fair value of its assets and liabilities, it's found that the fair value of its net assets to be $700,000, or $1 million in assets less $300,000 in liabilities. The fair value of half the business is $350,000, well over the $250,000 the company offered. In this manner, the procuring company would record a $100,000 gain ($350,000 fair value less $250,000 price paid).

Instances of a Bargain Purchase

Maybe the most well known of these bargain purchases during that turbulent period was Barclay's acquisition of Lehman Brothers (all the more explicitly, its North American investment banking operations) in September 2008, which brought about conveying roughly GBP 2.26 billion in negative goodwill to Barclays' books.

One more deal that rose up out of the financial crisis to delineate a bargain purchase: The takeover of HBOS plc (the holding company of Bank of Scotland plc) by Lloyds TSB in 2009 for undeniably not exactly the value of net assets created negative goodwill in the amount of roughly GBP 11 billion that was added to Lloyd's capital base and its net income that year.

Features

• An acquirer must record the difference between the purchase price and fair value as a gain on the balance sheet as negative goodwill.
• Bargain purchases include buying assets for not exactly fair market value.
• The difference in the price paid and fair value is recorded as a gain.