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Net Assets at Acquisition
Posted: 27 Mar 2024, 10:05
by 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
Re: Net Assets at Acquisition
Posted: 27 Mar 2024, 13:28
by 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,
Re: Net Assets at Acquisition
Posted: 27 Mar 2024, 16:14
by JRSB
It's an interesting question, since the cash never leaves the group. So the group isn't acquiring that cash.
Re: Net Assets at Acquisition
Posted: 27 Mar 2024, 16:15
by JRSB
PS are the (now) minority shareholders happy with this arrangement!
Re: Net Assets at Acquisition
Posted: 27 Mar 2024, 23:21
by 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.
Re: Net Assets at Acquisition
Posted: 28 Mar 2024, 05:22
by Adeel
Thanks everyone.
sowmiyanagarajan wrote: ↑27 Mar 2024, 13:28
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.
Leo wrote: ↑27 Mar 2024, 23:21
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.
Re: Net Assets at Acquisition
Posted: 28 Mar 2024, 12:19
by JRSB
Leo, maybe the subsidiary has net liabilities which is why the existing shareholders would be happy to be diluted in this way.
Re: Net Assets at Acquisition
Posted: 28 Mar 2024, 17:28
by 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.
Re: Net Assets at Acquisition
Posted: 29 Mar 2024, 10:17
by Adeel
Marek Muc wrote: ↑28 Mar 2024, 17:28
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.
Re: Net Assets at Acquisition
Posted: 29 Mar 2024, 10:18
by Adeel
JRSB wrote: ↑28 Mar 2024, 12:19
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.
Re: Net Assets at Acquisition
Posted: 29 Mar 2024, 11:20
by 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.
Re: Net Assets at Acquisition
Posted: 31 Mar 2024, 07:58
by 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..
Re: Net Assets at Acquisition
Posted: 31 Mar 2024, 16:31
by 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
Re: Net Assets at Acquisition
Posted: 31 Mar 2024, 16:35
by 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.
Re: Net Assets at Acquisition
Posted: 01 Apr 2024, 07:02
by Adeel
Thanks alot Leo for a detailed description.
That is really helpful
Regards