IFRS 3 provides that the acquirer recognises goodwill at the acquisition date, measured as the excess of (a) over (b): where (a) is the aggregate of the consideration transferred and the amount of any non-controlling interest in the acquiree, plus, in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree, and (b) is the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Components of Side (a): The Aggregate Consideration
The Standard provides that the aggregate consists of:
- the consideration transferred, measured in accordance with the Standard, which generally requires acquisition-date fair value;
- the amount of any non-controlling interest in the acquiree, measured in accordance with the Standard;
- in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
Component of Side (b): Net Identifiable Assets
The Standard provides that side (b) is the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, measured in accordance with the Standard.
Bargain Purchases (Negative Goodwill)
The Standard provides that, occasionally, an acquirer makes a "bargain purchase", a business combination in which the amount in side (b) exceeds the aggregate of the amounts specified in side (a). In that case, after the acquirer reassesses whether it has correctly identified all the assets and liabilities, it recognises the resulting gain in profit or loss at the acquisition date.
Illustrative Example (with Assumed Figures)
Suppose an entity acquires 100% of the shares of another entity for consideration transferred of 500,000 monetary units, with no non-controlling interest and no previously held equity interest, and the net fair value of the identifiable assets acquired and liabilities assumed is 420,000 monetary units. Goodwill is then calculated as 500,000 − 420,000 = 80,000 monetary units. If, instead, the net identifiable assets were 540,000 monetary units, exceeding the consideration transferred, the difference of 40,000 monetary units would, after reassessment, be treated as a gain on a bargain purchase recognised in profit or loss. This example is purely illustrative.
Why Is the Resulting Goodwill Later Subject to an Impairment Test?
Because the goodwill amount calculated at the acquisition date represents a residual that cannot be separately identified as a distinct asset among the identifiable assets, it is not amortised over a defined useful life as tangible assets are; instead, it remains recognised in the acquirer's financial statements until periodically reassessed to confirm that its recoverable amount has not fallen below its carrying amount. This makes accuracy in calculating the components of the goodwill formula at acquisition — the consideration transferred, the non-controlling interest, and the net identifiable assets — critically important, since any overstatement of the consideration transferred, or any shortfall in identifying the assets acquired and liabilities assumed, is reflected directly in the amount of goodwill recognised. For this reason, the Standard allows a defined measurement period after the acquisition date during which the acquirer may retrospectively adjust the provisional amounts initially recognised, if it obtains new information about facts and circumstances that existed at the acquisition date itself — reflecting the Standard's recognition that it is often difficult to reach a final, accurate measurement of every component of a business combination on the acquisition date itself, while such adjustments remain subject to a time limit set out in the Standard.
Legal References
- IFRS 3 — Business Combinations — Paragraphs 32, 34 and 45.
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