Goodwill and Bargain Purchase Accounting Under AASB 3 Guidelines

This report examines the accounting treatment of goodwill and bargain purchases in business combinations, as per AASB 3. It details the acquisition method, where goodwill is calculated as the difference between the purchase price and the fair value of net assets acquired, appearing as an intangible asset on the balance sheet. The report differentiates between purchased and internally generated goodwill, emphasizing the reliable measurement of the former. It covers the recognition of goodwill, including annual impairment tests, and the treatment of bargain purchases (negative goodwill), which are recognized as a gain on the income statement. The report also clarifies the application of AASB 3 in business combinations versus asset acquisitions, highlighting the importance of fair value measurement and the standards' focus on control of business entities. The conclusion reinforces the accounting standards' requirements for the application of negative goodwill and the exclusion of internally generated goodwill from the financial position. The report is based on the business combination and related accounting standards.

1
Name:
Course
Professor’s name
University name
City, State
Date of submission

2
Introduction -How to recognize and measure goodwill and gain on bargain purchase in
business combinations according to AASB 3
In calculating and recognizing goodwill and negative goodwill in accordance to
AASB 3, is done in steps involving the acquisition method in business combinations. In
goodwill purchasing, often the person purchasing will pay extra so that they are able to
acquire a subsidiary greater than the net assets fair value acquired. The difference between
the acquired fair value of net assets and the purchase price that is paid to the subsidiary is
called the goodwill or the purchase goodwill. To measure the goodwill, it is simply found in
subtracting the purchase price of the net assets from the price of acquired net assets (Boehm,
Teuteberg, and Zülch, 2016).
According to AASB 3, the purchased goodwill appears in the statement of
consolidated financial position or the balance sheet as an intangible asset. Internally
generated goodwill does not appear on the statement of financial position which is
consolidated as intangible assets due to the fact that it is internally generated. Unlike the
internally generated goodwill, purchased goodwill is included in the financial position
because it is reliably measured. A purchaser pays extra to acquire the asset which has a
measure of goodwill. Internally generated goodwill is left out as it is not reliably measured.
The cost initially is measured at the subsidiary date of acquisition (Dunn, Kohlbeck, and
Smith, 2016).
Recognition of Goodwill and Bargain purchase
The purchase of goodwill or impairment is not done. No amortization should be done
on purchased goodwill. Bargain purchase or negative goodwill is not amortized or
depreciated. There is no timeline where goodwill is used up. There is an indefinite timeline

3
on goodwill. Instead, the impairment tests should be done annually. If the impairment
evidence is not there, the goodwill value should be expensed and accounted for and it cannot
be reinstated. AASB 3 refers to a combination of businesses rather than a merger and
acquisition. A combination is a transaction where the acquired controls one or more business
entities (Elnahass, and Doukakis, 2019). In purchasing a controlled interest, the business may
require structures and in order to control structures in any way. Business combination
accounting does not apply to asset acquisition or grouping assets which is not part of the
business.
The accounting of assets for asset purchase differs from the combination of business
in several aspects which include; the assessment of whether a set of assets which are
intergrated and activities that are manageable as a normal market practice and as a set of
business. it is irrelevant where the seller operated a previous business and whether the acquire
wishes or intends to operate a set of businesses. A set can also be considered a business even
if it does not contain assets and activities that are used in business operation (Gaharan, 2015).
Bargain purchase gain in corporate accounting rules in IFRS 3 or AASB 3 requires that the
person acquiring the assets record the difference in the assets fair value and the purchase
price as a gain on the income statement account due to a goodwill that is negative. AASB 3
business combinations stipulates that incase an acquirer obtains the control of a business, the
acquisition method is used in business combination accounting which aims at recording
liabilities and assets acquired and measured at fair values on the acquisition date.
When a company acquires another, a purchase consideration is paid to the target
company’s shareholders. It is either valued at stock or cash and it can be of either company
(Kohlbeck, and Smith, 2015).. The acquirer get the assets net value and in many cases gets
more than a of assets fair value acquired. This is because not all the acquired assets get into

4
the fair value of the business, these are intangible assets such as goodwill, repute of the
business, customer satisfaction, culture, synergy etc. the bargain purchase or negative
goodwill is where the fair value of the assets acquired is greater than the combined worth of
the business. it might occur when a business is forced to sell (Lilien, Sarath, and Yan, 2019).
Conclusion
AASB 3 accounting guidance requires that in application of negative goodwill, before
any income recognition, the accounting standards requires us to make sure that there are no
unaccounted assets. Internally generated goodwill does not appear on the consolidated
statement of financial position as intangible assets due to the fact that it is internally
generated. Unlike the internally generated goodwill, purchased goodwill is included in the
financial position because it is reliably measured

5
References
Boehm, J., Teuteberg, T. and Zülch, H., 2016. Frequency of and Reasons for Bargain
Purchases–Evidence from Germany. Corporate Ownership and Control, 13(2), pp.313-328.
Dunn, K., Kohlbeck, M. and Smith, T., 2016. Bargain purchase gains in the acquisitions of
failed banks. Journal of Accounting, Auditing & Finance, 31(3), pp.388-412.
Elnahass, M. and Doukakis, L., 2019. Market valuations of bargain purchase gains: are these
true gains under IFRS?. Accounting and Business Research, pp.1-32.
Gaharan, C., 2015. Reporting Standards for Bargain Purchase Gain: Is the Objective
Achieved?. Journal of Accounting and Finance, 15(8), p.62.
Kohlbeck, M.J. and Smith, T.J., 2015. A gain by any other name: Accounting for a bargain
purchase gain. Issues in Accounting Education, 30(3), pp.1-14.
Lilien, S., Sarath, B. and Yan, Y., 2019. Fair value accounting, earnings management, and the
case of bargain purchase gain. Asian Review of Accounting.