How should you capitalize an acquisition and report your balance sheet??

Thanks Clement guess that answers the thread

Can I conclude then that goodwill accounting is ONLY AVAILABLE for <50% owned non-controlling associates? Thought this will have an implication on how companies view M&A.

(27-02-2014, 03:38 PM)specuvestor Wrote: Thanks Clement guess that answers the thread

Can I conclude then that goodwill accounting is ONLY AVAILABLE for <50% owned non-controlling associates? Thought this will have an implication on how companies view M&A.

Not exactly. Goodwill is recognized on initial acquisition of control over the subsidiary. For associates, they are accounted for using equity method and recognized initially at cost, so there is an implicit recognition of goodwill.

In this case, the group already has control over the subsidiary and therefore it's acquisition of further economic interest does not give rise to goodwill.

Oh yes equity method... I'm confused in midst of cranking my brain

Sorry to delve deeper but if A acquires 51% of B at $51 when book is $40 means they will OR can book $11 goodwill? And what happens when they increase their stake to say 75% for $24? Does the goodwill need to be reversed out or goodwill will increase further, or the additional goodwill of around $20 will be charged off PnL?

Thanks for the education... bit confusing to me.

(27-02-2014, 04:25 PM)specuvestor Wrote: Oh yes equity method... I'm confused in midst of cranking my brain

Sorry to delve deeper but if A acquires 51% of B at $51 when book is $40 means they will OR can book $11 goodwill? And what happens when they increase their stake to say 75% for $24? Does the goodwill need to be reversed out or goodwill will increase further, or the additional goodwill of around $20 will be charged off PnL?

Thanks for the education... bit confusing to me.

The key economic event is acquisition or cessation of control.

When A acquires 51% of the voting rights of B. It acquires control of the assets and liabilities of B. Thus the $11 difference is goodwill.

The further acquisition does not change the actual control of the subsidiary. It is just an acquisition of further economic rights, therefore the difference is set off against reserves. There is no need to recompute goodwill for the transaction.

(27-02-2014, 01:09 PM)Clement Wrote: The IFRS standards are prescriptive thus I would interpret that there is no option.

Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When the proportion of the equity held by non-controlling interests changes, the carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.[IFRS 10:23, IFRS 10:B96]

(27-02-2014, 04:32 PM)Clement Wrote: The key economic event is acquisition or cessation of control.

The further acquisition does not change the actual control of the subsidiary. It is just an acquisition of further economic rights, therefore the difference is set off against reserves. There is no need to recompute goodwill for the transaction.

Agree with you. I have removed my earlier post to avoid confusing others. Thank you.

(26-02-2014, 05:01 PM)CityFarmer Wrote:

(26-02-2014, 04:10 PM)Clement Wrote: This is a acquisition of further interest in a subsidiary. (no change in control)

For such transactions, they are treated as treasury transactions similar to share buybacks.

Treasury is to offset share capital, and other reserve is offsetted in this case. So they are treated differently, IMO.

Since the equity is reduced by 70 mil, so a one-time write-off of goodwill should be already done in income statement.

I didn't read the AR, so I might be wrong.

I read the company FR, verified the point, and yes I was wrong.

Learned one more new stuff on accounting, and thanks Clement for the clarification.

(27-02-2014, 04:32 PM)Clement Wrote:

(27-02-2014, 04:25 PM)specuvestor Wrote: Oh yes equity method... I'm confused in midst of cranking my brain

Sorry to delve deeper but if A acquires 51% of B at $51 when book is $40 means they will OR can book $11 goodwill? And what happens when they increase their stake to say 75% for $24? Does the goodwill need to be reversed out or goodwill will increase further, or the additional goodwill of around $20 will be charged off PnL?

Thanks for the education... bit confusing to me.

The key economic event is acquisition or cessation of control.

When A acquires 51% of the voting rights of B. It acquires control of the assets and liabilities of B. Thus the $11 difference is goodwill.

The further acquisition does not change the actual control of the subsidiary. It is just an acquisition of further economic rights, therefore the difference is set off against reserves. There is no need to recompute goodwill for the transaction.

Thanks much for the education. Learnt something today

I would never have imagined that it is possible to have historical goodwill yet charge off future goodwill from future acquisitions once control is confirmed.

But I guess at the new acquisition price of 24, the goodwill impairment will be tested?

(28-02-2014, 06:17 PM)mrEngineer Wrote: But I guess at the new acquisition price of 24, the goodwill impairment will be tested?

The goodwill impairment test and the further acquisition of economic interest are separate matters. Goodwill is tested for impairment annually or whenever there are indicators that it is impaired.

In this case, A paid $51 for a 51% controlling stake in B or roughly $1 per % of ownership. Following that they bought out a minority stake for the same price ($24 for 24%). Given that majority stakes will normally be valued at a premium due to it's ability to control the company, the transaction itself does not provide any evidence of impaired goodwill.

Ok thanks for pointing out and answering. I read specuvestor eg wrongly in terms of price per share.