What is the Acquisition Method?
The acquisition method is the approach required by IFRS 3 to account for business combinations. The acquirer identifies itself, measures identifiable assets and liabilities acquired at fair value, and then calculates goodwill or a bargain purchase gain.
Under the acquisition method, goodwill equals the consideration transferred plus any non-controlling interest and the fair value of any previously held equity interest, minus the fair value of the net identifiable assets acquired.
- 1↓Identify the acquirerDetermine which party obtains control in the business combination.
- 2↓Determine the acquisition dateThe date the acquirer effectively obtains control of the acquiree.
- 3↓Measure assets and liabilities at fair valueIdentifiable assets, liabilities and any non-controlling interest are recognized at acquisition-date fair value.
- 4Recognize goodwillIf consideration plus NCI exceeds net identifiable assets, the excess is goodwill; if not, a bargain purchase gain is recognized.
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Step-by-step worked examples
Company A acquires 100% of Company B. Consideration transferred is $800,000, there is no NCI, and the fair value of B's net identifiable assets is $650,000. What is goodwill?
Goodwill = P + NCI − FV(net assets) Goodwill = 800,000 + 0 − 650,000 = $150,000
Company X acquires 80% of Company Y for $560,000 cash. The 20% NCI is measured at a fair value of $140,000. Y's net identifiable assets have a fair value of $600,000.
Goodwill = 560,000 + 140,000 − 600,000 = $100,000
Company M acquires 100% of Company N for $300,000. N's net identifiable assets have a fair value of $340,000.
Goodwill = 300,000 + 0 − 340,000 = −$40,000 A negative result means a bargain purchase gain of $40,000 is recognized directly in profit or loss.
Flashcards
Quick quiz
Q1.Under IFRS 3, which method is used to account for business combinations?
Q2.A company acquires 100% of a subsidiary for $900,000; the fair value of net identifiable assets is $700,000. What is goodwill?
Q3.A negative result in the goodwill formula indicates:
Q4.At what date must the acquirer measure identifiable assets and liabilities?
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Common mistakes
Using book values of the acquiree's assets. — Correct: Assets and liabilities must be remeasured to fair value at the acquisition date.
Assuming acquisition-related costs are part of the consideration transferred. — Correct: Acquisition-related costs (legal, advisory fees) are expensed as incurred, not capitalized into goodwill.
Ignoring NCI when the acquirer buys less than 100%. — Correct: NCI's fair value (or proportionate share) must be included in the goodwill calculation.
Treating a bargain purchase gain as goodwill. — Correct: A negative result means a gain is recognized in profit or loss, not negative goodwill on the balance sheet.
FAQ
What is the acquisition method in accounting?
It is the IFRS 3 approach to business combinations, requiring the acquirer to measure identifiable assets and liabilities at fair value and recognize goodwill.
What is the acquisition method formula for goodwill?
Goodwill = consideration transferred + NCI + FV of any previously held interest − FV of net identifiable assets acquired.
How do you calculate goodwill under the acquisition method?
Add the consideration paid and the fair value of NCI, then subtract the fair value of the net identifiable assets acquired — see the worked examples above.
What are examples of the acquisition method in practice?
A company buying a controlling stake in another company and recognizing its assets, liabilities and any resulting goodwill at fair value on the acquisition date.