Goodwill is what is left when the price paid exceeds the fair value of the identifiable net assets acquired. Occasionally the subtraction runs the other way.
An apparent negative residual says the applicable consideration measure is less than the acquisition-date amount of identifiable net assets. It can arise in a forced sale, but the calculation can also expose an omitted item or an incorrect measurement. ASC 805-30-25-4 therefore requires the acquirer to reassess identification before recognizing a gain. ASC 805-30-30-5 also requires a review of the measurement procedures for the required items.
If the excess remains after that review, ASC 805-30-25-2 requires the acquirer to recognize the gain in earnings on the acquisition date. There is no negative goodwill balance and no deferral. If the applicable consideration measure is $4.2 million and reviewed identifiable net assets are $4.9 million, the gain is $700,000.
The reassessment requirement is the whole design. An acquirer that could book a gain simply by buying something would have an obvious way to manufacture income. So the standard makes the acquirer prove it looked for the mistake first. The acquirer also discloses the gain, where it appears in the income statement, and why the transaction produced it.
Put the concept to work
Understand this concept
- Explain what a negative residual in an acquisition means, and say why the acquirer must reassess before recognizing anything.
Apply this concept
- Compute the residual in an acquisition where fair value of identifiable net assets exceeds consideration, and record the resulting gain.
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Build on these ideas
- Bargain purchase gain — Understand
To apply this concept: Required. Recording the gain requires knowing it follows a reassessment.
- Goodwill — Apply
To apply this concept: Required. The gain is the same residual computation with the opposite sign.
To understand this concept: Required. The gain is what the goodwill computation produces when it comes out negative.
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- Bargain purchase gain — Apply
Required level here: understand. Required. Recording the gain requires knowing it follows a reassessment.