CFA Level II Exam · Intercorporate Investments

Business Combinations and the Acquisition Method

Updated 7 October 2026 · Fact-checked

In a business combination, the acquirer records the target's identifiable assets and liabilities at fair value and recognises goodwill as the excess of consideration (plus any non-controlling interest) over the fair value of net identifiable assets. If the result is negative, it is a bargain purchase gain in profit or loss.

Understand Business Combinations and the Acquisition Method

A business combination happens when one company (the acquirer) gains control of another (the target). Both IFRS and US GAAP require the acquisition method. The old pooling of interests method, which simply added book values together, is no longer allowed. It created no goodwill and hid the price paid.

Under the acquisition method, you treat the deal as a purchase. The acquirer puts the target's identifiable assets and liabilities on the consolidated balance sheet at fair value on the acquisition date, not at book value. This can include intangibles the target never recorded, such as brand names or customer relationships. Acquisition-related costs (legal, advisory) are expensed, not added to the price.

Goodwill is the leftover. It is what the acquirer paid above the fair value of identifiable net assets. It reflects synergies, workforce and other value that cannot be separately identified. Goodwill is not amortised; it is tested for impairment.

When the acquirer buys less than 100%, a non-controlling interest (NCI) remains. Under IFRS you may measure NCI at fair value (full goodwill) or at its proportionate share of the target's identifiable net assets (partial goodwill). Under US GAAP, NCI must be measured at fair value, so full goodwill is required. Full goodwill includes goodwill attributable to the NCI, so total assets and equity are higher.

If the fair value of net identifiable assets exceeds what was paid, you have a bargain purchase. The acquirer first rechecks its fair value measurements. If the excess remains, it recognises a gain in profit or loss on the acquisition date. No negative goodwill goes on the balance sheet.

Key formulas to remember

Goodwill (full goodwill): Goodwill = Consideration transferred + Fair value of NCI − Fair value of identifiable net assets; Required under US GAAP; optional under IFRS. Add the fair value of any previously held stake if the deal is achieved in stages.
Goodwill (partial goodwill, IFRS only): Goodwill = Consideration transferred + (NCI % × Fair value of identifiable net assets) − Fair value of identifiable net assets; Equivalent to consideration minus the acquirer's % share of net identifiable assets.
Fair value of identifiable net assets: Fair value of identifiable assets − Fair value of liabilities assumed; Include newly identified intangibles and deferred taxes; exclude the target's existing goodwill.
Bargain purchase gain: Gain = Fair value of identifiable net assets − (Consideration + NCI measurement); Recognised in profit or loss after reassessing the measurements.
Fair value adjustment: Excess of fair value over book value = Fair value of net assets − Book value of net assets; Extra depreciation on written-up assets reduces post-deal earnings.

How to solve Business Combinations and the Acquisition Method questions

Work through the vignette in this order. Most errors come from skipping the fair value step or using the wrong NCI basis.

1Identify the acquirer, the percentage acquired, and the consideration transferred (cash plus fair value of shares issued).
2Remove acquisition costs from the price. They are expensed.
3Find the target's book value of net assets, then apply the fair value adjustments to each asset and liability listed.
4Strip out the target's existing goodwill from book values. Add newly identified intangibles.
5Compute the fair value of identifiable net assets.
6Determine the NCI basis: fair value (full goodwill) or proportionate share (partial goodwill, IFRS only). Check whether US GAAP is stated.
7Compute goodwill using the formula. If negative, report a bargain purchase gain.
8Answer the specific question: goodwill, total assets, equity, NCI, or post-deal depreciation.

Quickest way: Goodwill in one line

When to use it: Use when the vignette gives price, percentage acquired and fair values, and asks only for goodwill or gain.

Compute net identifiable assets at fair value.
Full goodwill: price ÷ % acquired gives implied 100% value only if the NCI is valued at the same price per share. Otherwise use the stated NCI fair value.
Goodwill = (price + NCI value) − net assets.
Partial goodwill: price − (% acquired × net assets).
A negative answer means a bargain purchase gain, not negative goodwill.

Common mistakes in Business Combinations and the Acquisition Method

Using book value of the target's net assets instead of fair value.
The balance sheet is the first number shown in the exhibit.
Fix: Always look for a fair value adjustment table and apply it before calculating goodwill.
Including the target's existing goodwill in net identifiable assets.
Students take total equity as net assets.
Fix: Goodwill is not identifiable. Remove it from the target's net assets before computing new goodwill.
Capitalising acquisition costs into the price.
Older purchase accounting did this.
Fix: Expense advisory and legal fees. They do not change goodwill.
Applying partial goodwill under US GAAP.
Students forget the difference between standards.
Fix: US GAAP requires NCI at fair value, so only full goodwill applies. Partial is an IFRS option.
Recording negative goodwill on the balance sheet in a bargain purchase.
Confusing the sign of the formula.
Fix: Recognise the excess as a gain in profit or loss after reassessing the fair values.
Saying pooling of interests is still an option.
Old textbook comparisons.
Fix: Pooling is prohibited. Only the acquisition method is allowed. Know pooling only as a contrast: book values, no goodwill, no fair value step.

Worked examples

Example 1

Vignette: Altan Corp buys 80% of Brevo Ltd for €480 million in cash. The fair value of the 20% NCI is €110 million. Brevo's book value of net assets is €400 million, including €30 million of existing goodwill. Fair value of its property is €50 million above book value, and an unrecorded customer list has a fair value of €20 million. Altan paid €5 million in advisory fees. Under US GAAP: (1) What is the fair value of identifiable net assets? (2) What is goodwill? (3) How are the fees treated?

Show the solution

Book net assets €400m less existing goodwill €30m = €370m.
Add property step-up €50m and customer list €20m: 370 + 50 + 20 = €440m.
Goodwill = 480 + 110 − 440 = €150m.
Advisory fees of €5m are expensed, not part of consideration.

Answer: (1) €440 million. (2) €150 million. (3) Expensed in profit or loss.

Example 2

Vignette: Under IFRS, Corvin plc acquires 70% of Delta SA for £210 million. Delta's identifiable net assets have a fair value of £260 million. The fair value of the 30% NCI is £100 million. (1) What is full goodwill? (2) What is partial goodwill? (3) How much higher is full goodwill and why?

Show the solution

Full goodwill = 210 + 100 − 260 = £50 million.
Partial goodwill: NCI at proportionate share = 30% × 260 = £78m. Goodwill = 210 + 78 − 260 = £28m.
Check with the shortcut: 210 − (70% × 260) = 210 − 182 = £28m. This matches.
Difference = 50 − 28 = £22m.
The difference equals the NCI fair value less its proportionate share of net assets: 100 − 78 = £22m. It is the goodwill attributable to the NCI.

Answer: (1) Full goodwill is £50 million. (2) Partial goodwill is £28 million. (3) Full goodwill is £22 million higher, because the NCI is measured at fair value (£100 million) rather than at its proportionate share of net assets (£78 million), so goodwill includes the NCI's share.

Exam tips

Scan the vignette for the words IFRS or US GAAP first. They decide whether partial goodwill is possible.
Draw a quick table: book value, fair value adjustment, fair value. It prevents missed items.
Check whether the stated price is for the stake or for 100%. Do not gross up unless told to.
Expect conceptual questions on how goodwill choices change total assets, equity and ratios like debt-to-equity and ROE.
If the answer is negative, say bargain purchase gain. Options often include a negative goodwill trap.

Business Combinations and the Acquisition Method in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Business Combinations and the Acquisition Method: frequently asked questions

What is the difference between full goodwill and partial goodwill?

Full goodwill measures the NCI at fair value, so goodwill includes the part attributable to the NCI. Partial goodwill measures the NCI at its share of identifiable net assets, so goodwill covers only the acquirer's share. Partial goodwill is allowed only under IFRS.

Why is pooling of interests no longer used?

It combined book values and recorded no goodwill, so the price paid was not visible and deals were hard to compare. Current standards require the acquisition method, which records fair values and goodwill.

How do I calculate goodwill in an acquisition?

Add the consideration transferred and the NCI measurement, then subtract the fair value of identifiable net assets. Remember to remove the target's old goodwill and to expense deal costs.

Is goodwill amortised?

No. Under both IFRS and US GAAP, acquired goodwill is tested for impairment rather than amortised. For private companies, US GAAP offers an optional alternative that is outside this topic.