Business Combinations
Treatment under IFRS
The acquisition method is the only permitted method. All identifiable assets and liabilities are recognised at fair value. Goodwill = consideration transferred minus the fair value of the net assets.
- The only permitted method: the acquisition method.
- Identifiable intangible assets must be recognised separately (e.g. customer relationships, brands).
- Goodwill: not amortised; tested for impairment annually.
- Transaction costs: expensed as incurred.
- Contingent consideration (earn-outs): recognised at fair value.
Treatment under German GAAP (HGB)
Capital consolidation under § 301 HGB (the acquisition/revaluation method). A positive difference (goodwill) is presented as goodwill (Geschäfts- oder Firmenwert) and amortised systematically.
- § 301 HGB: capital consolidation using the revaluation (acquisition) method.
- § 309 HGB in conjunction with § 246 (1) sentence 4 HGB: goodwill is amortised systematically over its useful life.
- § 255 (4) HGB: purchased goodwill in the separate financial statements.
- Hidden reserves and charges are revealed as part of the revaluation.
Key differences
- Goodwill: systematic amortisation under HGB vs. an impairment test only under IFRS.
- Intangibles acquired in the combination: HGB tends to recognise fewer of them separately (e.g. customer relationships/brands).
- Transaction costs: expensed under IFRS; under HGB partly included in the cost of the investment.
- Earn-out arrangements: measured at fair value under IFRS; HGB allows more latitude in estimation and recognition.
Example
Worked example
Assumptions: Acquisition of a business for €10,000,000 (cash). The fair value of the other identifiable net assets is €4,000,000. In addition there are intangibles (customer relationships, brand) of €2,000,000. Assumption: under IFRS these are recognised separately, under HGB they are not (they are subsumed within goodwill). Useful life of goodwill and intangibles 10 years each (straight-line). All amounts in euros.
Step 1 – Purchase price allocation and goodwill
| Item | IFRS | HGB |
|---|---|---|
| Consideration (purchase price) | 10,000,000 | 10,000,000 |
| Other net assets (fair value) | 4,000,000 | 4,000,000 |
| Separately recognised intangibles | 2,000,000 | 0 |
| = Identifiable net assets | 6,000,000 | 4,000,000 |
| Goodwill (consideration − net assets) | 4,000,000 | 6,000,000 |
Because IFRS recognises more intangibles separately, goodwill is lower than under HGB.
Step 2 – Subsequent measurement of goodwill
| Feature | IFRS | HGB |
|---|---|---|
| Goodwill on initial recognition | 4,000,000 | 6,000,000 |
| Scheduled amortisation | no (impairment test only) | yes (useful life) |
| Annual goodwill amortisation | 0 | 600,000 |
| Goodwill after 1 year (no impairment) | 4,000,000 | 5,400,000 |
Step 3 – P&L effect in year 1 (no impairment)
| Expense | IFRS | HGB |
|---|---|---|
| Amortisation of separate intangibles | 200,000 | 0 |
| Scheduled goodwill amortisation | 0 | 600,000 |
| Total amortisation expense | 200,000 | 600,000 |
Step 4 – Journal entries
Acquisition (simplified):
| Account | Debit | Credit |
|---|---|---|
| IFRS: Identifiable net assets | 6,000,000 | |
| IFRS: Goodwill | 4,000,000 | |
| Bank | 10,000,000 | |
| HGB: Identifiable net assets | 4,000,000 | |
| HGB: Goodwill | 6,000,000 | |
| Bank | 10,000,000 |
Amortisation, year 1:
| Account | Debit | Credit |
|---|---|---|
| IFRS: Amortisation of intangibles | 200,000 | |
| Intangible assets | 200,000 | |
| HGB: Amortisation of goodwill | 600,000 | |
| Goodwill | 600,000 |
Key takeaway
In a business combination two effects combine: (1) IFRS recognises more intangibles separately, so goodwill is smaller; (2) IFRS does not amortise goodwill on a scheduled basis (impairment test only), whereas HGB amortises it over its useful life. On balance HGB shows a higher goodwill on the balance sheet and a higher ongoing amortisation expense. In addition: transaction costs are expensed immediately under IFRS but partly form part of acquisition cost under HGB; contingent consideration (earn-outs) is measured at fair value under IFRS.