equity under acquisition method

[stephaniez]

I found two different ways in calculating this:
1. CFAI Mock AM Q46
Total equity = non-controlling interest(40%) + amount paid for 60% interest + acquirer’s original capital stock + retained earning
2. CFAI Book, P183, Q26
Total equity = non-controlling interest (50%) + acquirer’s original capital stock + retained earning
THE AMOUNT PAID FOR 50% INTEREST IS NOT INCLUDED, WHICH ONE IS CORRECT??

 

[Bilal]

This is messing up my head too. I usually use the first method.

 

[AndrewUNH]

first one. If you issue new stock/equity to buy this thing then you must include that in your new equity

 

[stephaniez]

Thanks Andrew, so it seems to me:
In case of share purchase, use first one;
In case of cash purchase, use second one, am I right?

 

[AndrewUNH]

yes. can you find any EOCs or anything that illustrate this?

 

[prophets]

cash is coming off the balance sheet to pay for the difference. that reduces shareholders equity. it’s cut and dry. if you issue stock, there is no cash paid out.

 

[stephaniez]

I couldn’t..so i came ask.
But it totally makes sense:
in a cash offer, ttl assets is reduced by cash paid, and no additional stock is included in SE;
in a stock offer, ttl assets remain unchanged and SE is increased by additional stocks issued.

 

[Bilal]

To elaborate more on the stock offer:
Total Equity = CS + RE + Amount paid (putting 60% and 40% of amount paid is same as lump sum amount paid) however;
If there is good will :
Total Equity = CS + RE + Amount paid + non controlling interest
Under full goodwill method non control interest = (Amount paid / controlled interest) x non controlling interest
Under Partial Goodwill method non control interest = (FV asset - FV liab) x non controlling interest
Under the cash method with no good will, u just multiply non control interest by amount of $ paid.

 

[Bilal]

Bilal Wrote:
——————————————————-
>
> Under the cash method with no good will, u just
> multiply non control interest by amount of $ paid.
Sorry, you multiply it by amount of SHE acquired (CS + RE ) x non control interest

 

[RachaelEve]

Within this same item set from CFAI AM, #44:
Are you always supposed to subtract the pro rata amortization of the PPE from the investment account if this information is given? That threw me off.

 

[Bilal]

Yeah .. same goes to impairment of goodwill or amortization of license if the Fair value > Cost PPE .. u can to deduct it from Cost + Income x (%) - Div (%)