Purchase accounting and purchase price allocation under ASC 805 and IFRS 3

ASC 805 and IFRS 3 share the same core design. The acquirer identifies itself, fixes the acquisition date, recognizes the identifiable assets acquired and liabilities assumed at their acquisition-date fair values, and measures goodwill as the residual. The IFRS Foundation's summary of IFRS 3 says the same: allocate the cost to identifiable assets and liabilities on the basis of their fair values, allocate the rest to goodwill, and recognize any excess of net assets over consideration as a bargain purchase in profit or loss.

Three rules from the FASB's original Statement 141(R) still catch buyers out:

• Contingent consideration is recognized at fair value on the acquisition date, so an earn-out belongs on the opening balance sheet.
• Acquisition-related costs, such as legal and diligence fees, are recognized separately from the acquisition and don't go into goodwill.
• A bargain purchase, where net assets exceed consideration, is a gain in earnings after the acquirer re-checks that it identified and measured everything.

Goodwill is therefore consideration transferred, plus any noncontrolling interest and previously held interest, less the fair value of identifiable net assets.

The acquisition method applies only when the purchased set of assets and activities is a business. ASU 2017-01 added a screen under US GAAP: if substantially all of the fair value of the gross assets acquired sits in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen isn't met, the set needs at least an input and a substantive process that together contribute to the ability to create output. The Update took effect for private companies for annual periods beginning after December 15, 2018.

IFRS 3 has an equivalent optional test. The IFRS Foundation's page records that the October 2018 amendment to IFRS 3 narrowed the definition of a business and permits a simplified assessment of whether an acquired set is a group of assets rather than a business.

The distinction changes the accounting. An asset acquisition generally produces no goodwill and allocates its cost to the assets acquired. A business combination records goodwill and recognizes acquisition-related costs separately from the acquisition. Write the conclusion into a short memo before the allocation starts.

The allocation runs class by class. For each, someone owns the number and a source document supports it.

The deliverable is a workbook with one tab per class, a summary that ties to the purchase agreement's closing statement, and a note of every open item. Where the valuation specialist's report isn't ready by the first reporting date, the numbers go in as provisional amounts, which the next section covers.

Two Private Company Council alternatives change how much of the price lands in goodwill.

ASU 2014-18 lets an eligible private company stop recognizing customer-related intangible assets separately from goodwill unless they are "capable of being sold or licensed independently from the other assets of a business" (the Update's wording), and stop recognizing noncompetition agreements separately. A company that elects it must also adopt the goodwill amortization alternative from ASU 2014-02. That alternative amortizes goodwill straight-line over 10 years, or less if another useful life is more appropriate (ASC 350-20-35-63, reproduced in ASU 2021-03).

The election covers every in-scope transaction after the effective date, so you can't pick it for one deal and drop it for the next. The practical effect is fewer intangibles to value and a smaller valuation fee, set against a straight-line goodwill expense that hits earnings every year. Check how your credit agreement treats amortization in its earnings and net worth tests before electing.

IFRS has no equivalent. A subsidiary that reports to an IFRS parent recognizes customer relationships separately in the group numbers, and the bridge records that difference.

If the accounting is incomplete at the end of the reporting period of the deal, the acquirer reports provisional amounts. Under US GAAP the measurement period ends when the acquirer gets the information it was seeking, and it can't last more than one year from the acquisition date (ASC 805-10-25-14).

ASU 2015-16 changed how adjustments flow. The acquirer now records an adjustment to a provisional amount in the period in which it is determined, with the income effect, such as extra depreciation or amortization, calculated as if the accounting had been completed on the acquisition date. It presents separately, or discloses, the part of that charge that belongs to earlier periods.

IFRS 3, paragraph 45, goes the other way: the acquirer retrospectively adjusts the provisional amounts, so comparatives change. A US subsidiary reporting to an IFRS parent can therefore carry two different treatments of the same late valuation.

Acquired deferred revenue has its own rule. ASU 2021-08 requires the acquirer to recognize and measure contract assets and liabilities in accordance with ASC 606 as if it had originated the contracts. It took effect for entities other than public business entities for fiscal years beginning after December 15, 2023.

The standards agree on more than they differ, and the gaps that remain are specific.

• Noncontrolling interest. IFRS 3 lets the acquirer measure each noncontrolling interest at fair value or at its proportionate share of the acquiree's identifiable net assets, transaction by transaction. US GAAP measures it at fair value, so full goodwill is always the result.
• Measurement period adjustments. Retrospective under IFRS 3, current period under ASC 805 after ASU 2015-16.
• Private company alternatives. Available under US GAAP only.
• Acquirer in a variable interest entity. ASU 2025-03 changes how the accounting acquirer is determined when a VIE is acquired and takes effect for all entities for annual periods beginning after December 15, 2026.

For a side-by-side of the whole framework, see the US GAAP vs IFRS guide. The recurring revenue side of an acquired contract book sits with revenue recognition under ASC 606 and IFRS 15.