Business Combinations: Gain or Loss?

What happens when the fair values of assets acquired and liabilities assumed in a business combination exceed the transferred consideration?

a) Recognized as an ordinary gain from a bargain purchase

b) Recorded as a loss in the income statement

Answer:

a) Recognized as an ordinary gain from a bargain purchase

When the fair values of assets acquired and liabilities assumed in a business combination exceed the transferred consideration, it is recognized as a gain from a bargain purchase according to FASB ASC 805.

FASB ASC 805, Business Combinations, specifies the accounting treatment for situations where the collective fair values of the separately identified assets acquired and liabilities assumed in a business combination exceed the fair value of the consideration transferred. According to the standard, when this occurs, the difference should be recognized as a gain from a bargain purchase in the income statement.

The process involves a careful valuation of each asset and liability, followed by an allocation of the purchase price based on those fair values, with any excess recognized as a gain. This reflects the fact that the acquirer essentially paid less than the overall value of what was obtained.