Net Assets at Acquisition

[Adeel]

Hi,
I need guidance on the following:

If a Company (Parent) acquired a majority stake in Target Company through purchase of new shares issued by the Target Company. i.e. instead of existing shareholding selling their stake, Target Company issued new shares to the Company (Parent). The Company (Parent) paid cash to the Target Company to acquire those shares.

My Question is.. will that Cash (consideration paid to the Target Company) becomes part of "Net assets at acquisition" for goodwill calculation.

Regards

[sowmiyanagarajan]

For calculating goodwill at the time of acquisition cash will not be part of net assets, Calculation of consideration is taking into account the enterprise value of the company at the acquisition and cash wont be part of asset at time of the calculation,

[JRSB]

It's an interesting question, since the cash never leaves the group. So the group isn't acquiring that cash.

[JRSB]

PS are the (now) minority shareholders happy with this arrangement!

[Leo]

In this situation, you wouldn't get a goodwill, but depending on the percentage you acquire, you might end up with a bargain purchase.

[Adeel]

Thanks everyone.

For calculating goodwill at the time of acquisition cash will not be part of net assets, Calculation of consideration is taking into account the enterprise value of the company at the acquisition and cash wont be part of asset at time of the calculation,

May i know any reference from the IFRS as well on which i can base my argument for not including Cash from Parent as part of net assets.

In this situation, you wouldn't get a goodwill, but depending on the percentage you acquire, you might end up with a bargain purchase.

Thanks Leo. May i know the underlying reason for it.

[JRSB]

Leo, maybe the subsidiary has net liabilities which is why the existing shareholders would be happy to be diluted in this way.

[Marek Muc]

The consideration transferred includes assets transferred to the acquiree which remain within the combined entity (IFRS 3.38). This implies that the cash paid for shares is included in the net assets acquired so that the double entry is balanced. This cash payment equally affects both sides of the goodwill equation so goodwill or gain from a bargain purchase will be identical regardless of the approach used. Depending on the price paid for the shares, NCI measurement can exceed assets acquired so that you may end up recognising goodwill.

[Adeel]

The consideration transferred includes assets transferred to the acquiree which remain within the combined entity (IFRS 3.38). This implies that the cash paid for shares is included in the net assets acquired so that the double entry is balanced. This cash payment equally affects both sides of the goodwill equation so goodwill or gain from a bargain purchase will be identical regardless of the approach used. Depending on the price paid for the shares, NCI measurement can exceed assets acquired so that you may end up recognising goodwill.

Thanks
No. The consideration paid was not included in the net assets acquired (opening balance sheet) yet. I was confused whether to include it not.

[Adeel]

Leo, maybe the subsidiary has net liabilities which is why the existing shareholders would be happy to be diluted in this way.

The previous shareholders intentionally diluted their shareholding.

[Leo]

Whether you include it or not, it should not change your assessment of the goodwill. A PPA exercise should be performed.

Sometimes, the entity needs cash to grow and the existing shareholding can't put more cash into it, so it looks for external investors.

[Adeel]

Yes I am doing the PPA exercise. The goodwill amount is changing as net assets acquired becomes higher in case i include cash paid part of net assets..

[Leo]

Parent A:
Cash; 1100
Equity: 1100

Target:
Net assets: 1000
Equity: 1000

Parent A subscribe for 1100 of the shares issued by the Target, existing shareholder will not participate and will lose majority.
Parent A will hold 1100/2100=52.38% after issue.

After issue:
Target:
Net assets: 2100
Equity: 2100

Goodwill:
Purchase price: 1100
52.38% of net assets: 2100 * 5238% = 1100
Goodwill=0

Conso of parent A after acquisition:
Net assets: 1000
Cash: 1100
Equity of the owner of parent: 1100
NCI: 1000

[Leo]

if you have identified there are some intangibles, this will affect the goodwill.
similarly, if there are intangibles, NCI might have another fair value which may counterbalance the goodwill.

the above is a V0.

[Adeel]

Thanks alot Leo for a detailed description.
That is really helpful

Regards