Purchase of a Business by a Company: IFRS 3 & Goodwill

Last reviewed: July 2026.

A purchase of a business by a company can be a business combination under IFRS 3 or an acquisition of assets that does not constitute a business. That classification changes the accounting for goodwill, transaction costs, deferred tax, measurement and later reporting.

Quick answer: first decide whether the acquired set is a business. If it is, identify the acquirer and acquisition date, measure consideration and identifiable net assets at the required acquisition-date amounts, and recognise goodwill or a bargain-purchase gain. If it is an asset acquisition, allocate cost to the identifiable assets and liabilities without recognising goodwill.

Contents

1. Business combination or asset acquisition?
2. IFRS 3 acquisition method
3. Consideration transferred
4. Identifiable net assets
5. Goodwill and bargain purchase
6. Worked example
7. Acquisition costs and contingent consideration
8. Measurement period and subsequent accounting
9. Individual and consolidated accounts
10. Controls, disclosures and common mistakes

Business combination or asset acquisition?

The first step is to determine whether the acquired set meets the definition of a business. IFRS 3 applies the acquisition method to a qualifying business combination. An acquisition of an asset or a group of assets that is not a business is accounted for under the relevant Standards and does not create goodwill.

Feature	Business combination	Asset acquisition
Acquired set	Meets the definition of a business	Does not meet the definition of a business
Method	Acquisition method under IFRS 3	Allocate cost to identifiable assets and liabilities under applicable Standards
Goodwill	Recognised when the acquisition amount exceeds identifiable net assets	Not recognised
Transaction costs	Generally expensed, except qualifying debt or equity issue costs	Treatment follows the relevant asset and liability Standards

Combinations between entities or businesses under common control are outside the normal scope of IFRS 3. The reporting entity must select and disclose an appropriate accounting policy under the applicable requirements.

The IFRS 3 acquisition method

1. Identify the acquirer. The acquirer is the entity that obtains control. The legal issuer of shares is not automatically the accounting acquirer, particularly in a reverse acquisition.
2. Determine the acquisition date. This is the date control passes. It may differ from the contract-signing, legal-completion or payment date.
3. Recognise and measure identifiable assets and liabilities. Acquisition accounting is based on the required acquisition-date amounts, including separately identifiable intangible assets.
4. Measure non-controlling interests when relevant. The permitted basis affects the amount of goodwill.
5. Recognise goodwill or a bargain-purchase gain. This calculation is completed only after the consideration and identifiable net assets have been measured.

For the practical debits and credits, use the separate guide to business purchase journal entries for cash, shares and contingent consideration.

Measure consideration transferred

Consideration can include cash, shares issued, other assets transferred, liabilities incurred to former owners, deferred payments and contingent consideration. Each component is measured under IFRS 3 and the related Standards at the acquisition date.

Payments linked to continuing employment may represent remuneration for post-acquisition service rather than purchase consideration. A careful review of the agreement is required before adding them to goodwill.

Recognise identifiable net assets

The acquirer recognises identifiable assets acquired and liabilities assumed separately from goodwill. A purchase-price allocation may identify customer relationships, brands, contractual rights, technology and other intangible assets that were not recognised in the seller’s own financial statements.

Using the seller’s book values without an acquisition-date measurement assessment can materially misstate goodwill. The analysis should also consider contingent liabilities, leases, employee benefits, tax and other specified exceptions.

Goodwill and bargain purchase

Goodwill = Consideration transferred + NCI + previously held interest − fair value of identifiable net assets acquired

Goodwill represents future economic benefits from acquired assets that are not individually identified and separately recognised. It is a residual from acquisition accounting, not a general valuation of the company’s reputation.

If the identifiable net assets exceed the acquisition amount, reassess the identification and measurement of all components. After verification, a bargain-purchase gain is recognised in profit or loss rather than recording a negative-goodwill liability.

See the detailed goodwill accounting guide under IFRS 3 and IAS 36.

Worked business-purchase example

A company pays 900,000 CU cash for a business. Identifiable assets have a fair value of 1,200,000 CU and liabilities assumed are 420,000 CU.

• Net identifiable assets: 1,200,000 − 420,000 = 780,000 CU
• Goodwill: 900,000 − 780,000 = 120,000 CU

The simplified acquisition entry debits identifiable assets and goodwill and credits the liabilities assumed and cash. The complete balanced entry is shown in the business purchase journal-entry guide.

Acquisition-related costs, deferred consideration and contingent payments

Legal, advisory and due-diligence costs for a business combination are generally recognised as expenses rather than included in goodwill. Incremental costs of issuing debt or equity are accounted for under the relevant financial-instrument requirements.

Deferred cash consideration may require discounting. Contingent consideration is recognised at acquisition-date fair value and classified according to its terms. Later accounting differs for equity-classified and liability-classified amounts.

Purchase agreements may also contain working-capital targets, debt-free cash-free clauses and completion adjustments. Distinguish changes to purchase price from post-acquisition operating transactions.

Measurement period and subsequent accounting

Provisional acquisition amounts may be adjusted during the measurement period when new information relates to facts that existed at the acquisition date. The measurement period cannot exceed one year from the acquisition date.

After acquisition:

• depreciate property, plant and equipment under the relevant policy;
• amortise finite-life intangible assets;
• test goodwill for impairment at least annually and when indicators exist;
• remeasure liabilities under their applicable Standards;
• process consolidation adjustments and intragroup eliminations where required.

Individual-company and consolidated accounts

The legal structure determines where the accounting entries appear. A direct acquisition of business assets records the acquired assets, liabilities and any qualifying goodwill in the purchasing entity’s books. A share acquisition normally records an investment in a subsidiary in the parent’s separate financial statements.

In consolidated financial statements, the parent’s investment is eliminated against the subsidiary’s acquisition-date equity and replaced with the underlying net assets, goodwill and any non-controlling interest. Review the group accounts and consolidation guide.

Controls, disclosures and common mistakes

• Document the business-definition and control assessments.
• Retain purchase agreements, completion statements and valuation reports.
• Reconcile consideration to cash, shares, deferred and contingent amounts.
• Approve acquisition-date fair-value adjustments and identifiable intangibles.
• Separate acquisition costs from consideration.
• Track provisional amounts and measurement-period adjustments.
• Establish goodwill impairment monitoring and disclosure controls.

Common mistakes

• assuming every purchase is a business combination;
• recognising goodwill in an asset acquisition;
• capitalising advisory costs into goodwill;
• using book values without a fair-value assessment;
• failing to recognise identifiable intangible assets;
• ignoring contingent-consideration classification;
• recording the legal acquirer as the accounting acquirer automatically;
• posting consolidated goodwill into the parent’s separate ledger without a direct business-asset acquisition.

Frequently asked questions

Is goodwill recognised in every business purchase?

No. Goodwill arises in a qualifying business combination when the acquisition amount exceeds identifiable net assets. An asset acquisition does not create goodwill.

Are acquisition legal fees included in goodwill?

For a business combination, acquisition-related professional costs are generally expensed. Debt and equity issue costs follow the relevant financial-instrument requirements.

Can provisional fair values be changed later?

They may be adjusted during the IFRS 3 measurement period when the new information relates to facts existing at the acquisition date. The period cannot exceed one year.

Is goodwill amortised under full IFRS?

No. Goodwill acquired in a business combination is tested for impairment annually and when impairment indicators exist.

Authoritative references and related guides

• IFRS Foundation: IFRS 3 Business Combinations
• IFRS Foundation: IAS 36 Impairment of Assets
• ACCA: Accounting for goodwill
• Business Purchase Journal Entries: Cash, Shares & Goodwill
• Share Capital Accounting: Equity, Entries and Presentation

Key takeaway: classify the transaction first, apply the correct acquisition or asset-purchase method, measure consideration and identifiable net assets carefully, and calculate goodwill only after the purchase-price allocation is complete.

This article is for educational purposes. Actual business combinations require entity-specific accounting, valuation, tax and legal analysis.

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