Accounting Treatment of Business Combination

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Irsh12#
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Joined: 08 Jun 2019, 16:47

Accounting Treatment of Business Combination

Post by Irsh12# »

Please i need answer to below questions after detail of case.
Example: Parent Co A acquired 100% shares of Co B at USD 100 M whereas Co B has net assets of 80 M. Out of 100 M only 60 M was paid by taking loan by Co A and 40 M which was loan of subsidiary that was taken with corporate guarantee of parent Co A even parent Co (A) have nothing to with 40 M loan other than corporate guarranttee because it was already taken by Co B some years ago.
Q.1 At what amount investment to be recorded in Co A i.e. at 100 M or 60 M
Q.2 Is there any negative goodwill because FV of Assets was 70 M at acquisition date whereas Co A had actually paid 60 M cash because 40 M was loan taken that was of subsidiary (Co B)
Q.3 If Co A record gain due to negative goodwill than assets has to be reduced so what we should we say to board even board assumed we have to pay goodwill because deal was in 100 m whereas FV of assets was 80 M.
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Marek Muc
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Re: Accounting Treatment of Business Combination

Post by Marek Muc »

I don’t see any ‘negative goodwill’ here. In consolidated financial statements, it doesn’t really matter which entity pays. If Parent A paid 60m and Subsidiary B paid 40m, then total consideration would be 100m. Alternatively, if the payment by Subsid B of 40m is to be treated as a capital distribution to selling shareholders before the business combination, then total price for Subsidiary B will be 60m only, but at the same time acquired assets of Subsid B also drop by 40m (i.e. by the amount of distributed cash as Parent A doesn't acquire it) so that, again, there will be no ‘negative goodwill’.

More information on the arrangement itself is needed to determine how to treat the 40m paid by Subsid B and what is the impact on standalone accounts of both entities. What was the legal title of this payment? Was it made at the same time as Parent A took control over Subsid B or sometime later?
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