Bargain Purchase Research Articles

The value-relevance of gains on bargain purchase: do actions speak louder than words?

PurposeThis paper investigates whether disclosure quality and a history of overpaying for acquisitions are associated with differences in the value-relevance of gains on bargain purchase with high disclosure prominence.Design/methodology/approachFindings are from multivariate regression results, using a sample of firms listed in South Africa from 2010 to 2019, where a mandatory earnings reconciliation provides high disclosure prominence for gains on bargain purchase.FindingsGiven high disclosure prominence, disclosure quality is not associated with differences in the pricing of gains on bargain purchase. Instead, most gains on bargain purchase are priced as future losses (unrecognised liabilities). However, when a firm has a history of overpaying for acquisitions, gains on bargain purchase are priced as transitory economic gains.Research limitations/implicationsFurther research is required to determine if overpaying for acquisitions similarly communicates the credibility of gains on bargain purchase when disclosure prominence is low.Practical implicationsDisclosure prominence can reduce disclosure processing costs and increase the value-relevance of complex acquisition accounting. High disclosure quality cannot compensate for a weak acquisition track record.Originality/valueFindings deepen our understanding of the pricing of gains on bargain purchase. This paper presents empirical results that reconcile previously conflicting theoretical views of gains on bargain purchase (as unrecognised assets or as unrecognised liabilities), by shedding light on the role that a record of overpaying for acquisitions plays in the value-relevance of gains on bargain purchase.

The bargain purchase option: Should it be more than an option?

This study examines the bargain purchase option, which gives the lessee the option to buy the leased asset at the end of the lease period at a price significantly less than its fair market value. The study analyses the approach that the laws of Jordan and the United Arab Emirates (UAE) employ to enable the lessee to practice this option (Al-Azzawi, 2013). To achieve this goal, the main foundations and characteristics of the lessee’s option to purchase are studied under both jurisdictions showing that while Jordanian law treats the option to purchase as a contractual choice (Al Khasawana, 2005), the UAE law moved further to protect the option by law. This difference is discussed in terms of its impact on the degree of protection that prospective users of financial leases may enjoy with regard to the bargain purchase option. This article concludes with some results and recommendations for sake of improvement, mainly the need to embrace legal protection of the option to purchase under the Jordanian legal system, and the need to grant the lessee the right to seek compensation in the case of lessor’s failure to transfer the leased property within the period set by the law in the UAE.

Economic consequences of bargain purchase gains under ASC 805: evidence from banking industry

ABSTRACT I examine whether bargain purchase gains (previously known as negative goodwill) reported under FASB’s Accounting Standards Codification 805, Business Combinations (ASC 805) in FDIC-assisted transactions represent economic gains to the acquiring banks and thereby qualify as part of banks’ Tier 1 capital. In a sample of 135 publicly-held U.S. banks that acquired failed banks in the period January 2009-April 2012, I find that bargain purchase gains are positively associated with acquirers’ future stock market and operating performance. Also, bargain purchase gains appear to capture expected future gains, including and beyond the FDIC subsidy. Specifically, the component of bargain purchase gains that is less likely related to the FDIC subsidy is positively associated with acquirers’ future short-run and long-run stock market performance and accounting operating performance. Finally, the factors, such as agency problem, internal control strength, and corporate governance strength, that affect the reliability of financial reporting matter for the reliability of bargain purchase gain estimation. Overall, the results imply that fair value accounting as implemented under ASC 805 enables bargain purchase gains to reliably reflect expected future economic gains, rather than measurement error or agency problem.

Market valuations of bargain purchase gains: are these true gains under IFRS?

This study investigates stock market valuations for bargain purchase gains (BPGs) in the context of International Financial Reporting Standards (IFRS) between 2005 and 2014. Motivated by the increased frequency and high concentration of BPGs in Europe, we study a sample of acquirers listed on the London Stock Exchange to assess the value relevance of BPGs (a) under discrepant disclosure practices (i.e. disclosure versus non- disclosure of the reasons for the gains), (b) before and after the revision of IFRS 3, and (c) considering different income classifications for BPGs (operating or non-operating earnings). BPGs, on average, are not significantly valued by the stock market. However, the post-IFRS 3 revision period, marked by stricter measurement criteria and additional disclosure requirements, witnessed a significant shift in firm valuations. BPGs for which the reason for the gain is disclosed are positively valued only in the post-IFRS 3 revision period. BPGs are consistently perceived as value irrelevant for those firms which fail to comply with mandated IFRS 3 disclosure requirements regarding the reason for the gain. Finally, BPGs classified as a component of non-operating income with sufficient note disclosure on the reason for the gain are significantly associated with prices and returns.

Fair value accounting, earnings management, and the case of bargain purchase gain

Purpose The purpose of this paper is to investigate the association between bargain purchase gains (BPGs) booked by the acquirer and smoothing of acquirers’ earning performance across time. Design/methodology/approach The authors use a sample of 122 bargain purchase acquisitions in non-financial industries from 2009 to 2012 and a pair-match control group of 122 goodwill acquisitions. Findings The authors find that BPGs, and in particular, the Level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns. Originality/value This study is the first one to investigate bargain purchase acquisitions in a broad range of non-financial industries and suggests that managers are using the valuation of intangibles to avoid unfavorable earnings even though these valuations are not credible to investors.

Market Valuations of Bargain Purchase Gains: Are These True Gains under IFRS?

This study investigates stock market valuations for bargain purchase gains (BPGs) in the context of International Financial Reporting Standards (IFRS) between 2005–2014. Motivated by the increased frequency and high concentration of BPGs in Europe, we study a sample of acquirers listed on the London Stock Exchange to assess the value relevance of BPGs (a) under discrepant disclosure practices (i.e., disclosure versus non- disclosure of the reasons for the gains), (b) before and after the revision of IFRS 3, and (c) considering different income classifications for BPGs (operating or non-operating earnings). BPGs, on average, are not significantly valued by the stock market. However, the post-IFRS 3 revision period, marked by stricter measurement criteria and additional disclosure requirements, witnessed a significant shift in firm valuations. BPGs for which the reason for the gain is disclosed are positively valued only in the post-IFRS 3 revision period. BPGs are consistently perceived as value irrelevant for those firms which fail to comply with mandated IFRS 3 disclosure requirements regarding the reason for the gain. Finally, BPGs classified as a component of non-operating income with sufficient note disclosure on the reason for the gain are significantly associated with prices and returns.

Perceived values, price fairness, and behavioral intentions toward luxury fashion brands - A comparison of luxury, luxury-bargain, and non-luxury consumers -

This study examined whether and how consumers who seek a bargain in their shopping for luxury fashion brands differ from traditional luxury consumers or non-luxury consumers on their market-related attitudes. To do so, this study compared multi-dimensional perceived values, fairness price perceptions, satisfaction with purchase, brand loyalty, and future purchase intention among luxury consumers, luxury-bargain seekers, and non-luxury consumers. Data was obtained from online surveys and the market-related attitudes were compared using an ANOVA test. The comparion of three types of consumers revealed that luxury-bargain seekers and regular luxury consumers are distinct consumer markets. Overall, luxury consumers displayed high perceived values and brand loyalty and were fairly satisfied with the purchase at full-prices. On the other hand, luxury-bargain seekers showed significantly low perceived social value, perceived fairness toward the original price of the brands, and brand loyalty. They were satisfied with the bargain purchase but not likely to purchase the luxury at full-prices in the future. Understanding these distinct types of consumers and targeting them with different product and pricing strategies are important for luxury brands and retailers to expand luxury consumer base without diluting their brands’ prestige image. Potential marketing strategies based on the findings of this study were suggested.

A Research Note on Bargain Purchase Gains on Acquisition

AbstractThis research note explores the incidence, amounts, disclosure and potential sources of bargain purchase gains reported by an Australian sample of firms during 2013–15. It finds that 7.58% of the sample acquirers reported bargain purchase gains during this period. The median gain as a percentage of consideration transferred was 18.90%. In contravention of IFRS 3 Business Combinations, not all acquirers with material bargain purchase gains disclosed in notes why the gain arose. Finally, the note reports preliminary evidence suggesting uncertainty about the sources of the gain.

Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain

The new accounting standard (FASB ASC 805) requires acquiring firms to estimate the fair value of net assets acquired and recognize the excess amount over purchase price as a bargain purchase gain, a component of current earnings. The flexibility in fair value measurement provides acquiring management with discretion to determine the amount of the bargain purchase gain, and thereby, inflate income. This paper investigates the association between bargain purchase gains booked by the acquirer and smoothing of acquirers’ earning performance across time. We find that bargain purchase gains, and in particular, the level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns.

Intended or Unintended Consequences of Business Acquisitions: The Case of Financial Services Institutions

ASC 805 gives the management of an acquiring firm flexibility in valuation and the possibility of recognizing day one bargain purchase gains (BPG). BPG acquisitions occurred frequently in the financial services industry during the crisis of 2008 and some of these acquisitions were assisted by the FDIC which provided partially indemnification against future losses. The combination of these two events set up a unique situation to study fair value accounting. By using the data from all bank transactions, we are able to highlight the fundamental tension between relevance and reliability in fair value accounting. Our results show that in FDIC assisted transactions, fair values reflected the underlying economic transactions more accurately whereas non-FDIC assisted BPG transactions suggest that management was able to use inflated fair values to present an overoptimistic picture of the acquisition.

Bargain Purchase Gains in the Acquisitions of Failed Banks

Effective for years beginning on or after December 15, 2008, bargain purchase gains (BPGs) are recorded within income from continuing operations when the fair value of the net assets acquired exceeds the acquisition cost. Although the Financial Accounting Standards Board (FASB) argues that the BPG treatment more faithfully represents the economics of the transaction, they also acknowledge that it creates an opportunity for inappropriate gain recognition. We examine management opportunism and investor valuations regarding the recognition of a BPG using a sample of 142 acquirers that made Federal Deposit Insurance Corporation (FDIC)-assisted bank acquisitions in 2009 and 2010. We find that acquirer banks with relatively strong incentives to boost earnings are more likely to record a BPG, suggesting that firms use the BPG treatment opportunistically. Despite this finding, we observe that the market values the BPGs, albeit with less persistence than the other major components of operating income, and reacts positively to acquisition announcements with BPGs. We explore these seemingly contradictory findings further and find that more suspicious BPGs receive lower valuation multiples. Overall, we provide evidence consistent with managers opportunistically exercising discretion within acquisition accounting and the market differentially pricing BPGs based on underlying incentives to boost earnings.

A Gain by Any Other Name: Accounting for a Bargain Purchase Gain

ABSTRACT Students gain insight into a unique accounting treatment in acquisition accounting by completing this case—that of a bargain purchase gain (BPG). In December 2007, the Financial Accounting Standards Board (FASB) revised accounting for business combinations when they promulgated Statement of Financial Accounting Standard No. 141R, Business Combinations. Under the revised standard, acquirers record net assets of the acquiree at their respective fair market values at the time of acquisition and recognize the excess of net assets over the consideration paid as a BPG included in income from continuing operations. This case takes place after the acquisition is negotiated and the consideration is agreed upon. Students are required to estimate fair values of acquired net assets based on the information provided, determine whether goodwill or a bargain purchase gain exists, and evaluate the impact of this transaction on the financial statements. The case also requires students to consider subjectivity within the analysis, as well as to identify potential incentives that may influence certain estimates and judgments that managers make. The case is appropriate for accounting courses where business combinations, goodwill, and fair value estimation are discussed.

Accounting for Business Combinations: Contrasting IFRS 3 Converged IND AS 103 with AS 14

Business combinations have become the most preferred route for business houses to achieve growth at a faster pace, given today’s intensely competitive global business environment. In regard to accounting for business combinations, the paper aims to compare and contrast the provisions of old Accounting Standard (AS) 14 on ‘Accounting for Amalgamations’ issued by the Institute of Chartered Accountants of India (ICAI) in 1995 with that of new International Financial Reporting Standard (IFRS) 3 converged Indian Accounting Standard (Ind AS) 103 on ‘Business Combinations’ issued by ICAI and notified as ‘standards’ by the Ministry of Corporate Affairs (MCA) in 2011. The paper showcases extensive coverage in Ind AS 103 vis-à-vis AS 14 not only in respect of accounting method, valuation of assets and liabilities, nature of consideration, measurement of non-controlling interest, treatment of goodwill / capital reserve or bargain purchase to mention a few, but also in its reference to various types of business combinations, including that of reverse acquisitions and business combinations under common control.

Bargain Purchase Gains and the Acquisitions of Failed Banks

In December 2007, the FASB revised accounting for business combinations and permitted firms to record a bargain purchase gain within current earnings at the completion of a business combination. Although the FASB contends that the new treatment improves the representational faithfulness of the acquirers’ current earnings, the ability to recognize a gain in current net income creates a contemporaneous opportunity for earnings management. We use a sample of 2009 FDIC-assisted bank acquisitions to examine the unintended and intended consequences of the revised standard. Despite finding evidence consistent with firms recognizing the gain to avoid reporting earnings declines, we find that the market values the gain similar to other transitory items. Overall, our findings provide support for the FASBs decision to recognize a gain associated with business combinations in current earnings.

Lease Accounting Research and the G4+1 Proposal

INTRODUCTION The Group of Four Plus One, or G4+1 for short, is a cooperative effort by national accounting standard setters from Australia, Canada, New Zealand, the United Kingdom, and the United States plus the International Accounting Standards Committee. Conclusions reached by the G4+1 are not recognized as GAAP in any financial reporting jurisdiction. However, by the very nature of its membership, its conclusions influence standard setting in many jurisdictions. Thus, publication of Leases: Implementation of a New Approach (Nailor and Lennard 2000) indicates that accountants may soon be redeliberating the appropriate accounting treatment for lease transactions. Evidence from empirical academic research on lease accounting may be useful to regulators and their constituents as they redeliberate reporting standards for lease transactions. This commentary provides an overview of key results from prior research and, where appropriate, proposes possible future research topics in the leasing area. [1] LESSEE ACCOUNTING ISSUES Most empirical research on financial reporting of leases concentrates on the lessee's use of operating vs. capital lease accounting. The term operating lease accounting method means that the lessee recognizes rent expense on the income statement and does not recognize lease assets or lease liabilities in the balance sheet. Under the alternative capital lease accounting method, the lessee initially recognizes a lease asset and a lease liability in the balance sheet and subsequently records interest expense on the liability and depreciation expense on the asset. On average, lessees seem to prefer operating lease accounting, and much of the empirical research investigates the implications of unrecorded lease commitments. Statement of Financial Accounting Standards No. 13, (FASB 1976) (hereafter SFAS No. 13) provides current guidance for lessees. Noncancelable leases that meet any one of four general criteria (transfer of ownership, bargain purchase option, lease term [greater than or equal to] 75 percent useful life, present value of commitments [greater than or equal to] 90 percent of asset's fair value) must be capitalized. [2] Future payments under both capital and operating leases must be disclosed in the notes. Under the G4+1 proposal, lessees recognize the fair value of any assets and liabilities contained in a lease contract. Recognition begins when the lessor makes the property available to the lessee. Thus, lessee balance sheets are expected to reflect additional lease liabilities if this new approach is adopted. Evidence in Imhoff et al. (1993, 347) and others suggests that the additional lease liabilities could be substantial. Using the operating lease commitments disclosed under SFAS No. 13, Imhoff et al. (1993) constructively capitalize operating leases by estimating the present value of operating leases (PVOL) for a sample of 29 airlines and 51 grocery stores. The median PVOL is $195 million for airlines and $57 million for grocery stores, and these amounts are 35--40 percent as large as median total on-balance sheet liabilities. Lessee Accounting Research: An Analysis of Three Decision Contexts The members of G4+1 agree that the purpose of financial reporting is to provide information for making economic decisions. Empirical research incorporates this view by identifying and estimating linkages between accounting information and actions taken by decision makers. In my discussion of research on lessee accounting, I decompose the research into three decision contexts--financial statement analysis of equity risk, financial statement analysis of equity value, and decisions/actions by management. Research Related to the Risk of the Lessee's Equity Most empirical research on lessee accounting is based on financial statement analysis as the decision context, with particular emphasis on how unrecorded lease commitments might affect assessments of shareholder risk. …

Acquisition fallacies and net value added

Outlines the basic arithmetic of value and price in mergers and acquisitions, focusing on value and ignoring short‐lived accounting effects. States company buyers must select targets in which more value can be created, Uses figures and panels to give added explanation to ideas here, and the three common acquisition fallacies are included: fanciful buying; financial engineering; and bargain purchase.