Frequency of and reasons for bargain purchases – Evidence from Germany

Abstract

This study investigates the prevalence of transactions resulting in negative goodwill under IFRS 3 Business Combinations. For a sample of 1,440 firm-year observations of listed German firms for the years 2005 to 2013, we find 96 negative goodwill transactions which give rise to an immediate gain recognized by the acquirer. Besides the fact that “bargain purchases” are not as rare as assumed by the standard setter when developing the current guidance, we document the reasons for the occurrence of negative goodwill. Our findings show that “bargain purchases” indeed account for the single most disclosed reason in our sample. However, alternative reasons such as future restructuring activities or market conditions are together equally likely to explain the existence of negative goodwill. Therefore, our results question whether the current treatment of negative goodwill as an immediate gain is most appropriate.