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

[wahkao]

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


I am still learning some basic reading of balance sheet and came across something very strange. I hope to learn a thing or 2 from expert here.

This case study involved Pan United paying $100M for an acquisition and and capitalized it at only 30M. And wrote 70M as a "loss".
Is this correct? Who or what accounting rule decides they should capitalize at 30M or 100M? As I recall in accounting, they paid $100M, they should capitalize this on their balance sheet at $100M.

What are they thinking doing this.....
My guess is that
-the directors want to buy their own shares?
-They want to increase ROA/ROE performance?
-Avoid taxes?
- Some accounting rule requires them to do this ?

I really dunno. anyone can advice me what is going on?
Am I mis-understanding some accounting rules wrongly?


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[weijian]

For this specific case, my guess is because the target, CXP was already a subsidiary of PanUnited. As you can see from the press release, this transaction involved an increase in stake from 51.3% to 85.5%.

As CXP is a subsidiary and its valuation is already recorded on PanUnited's balance sheet, PanUnited has to take an impairment loss as the acquisition price is much higher than what it records on its books. This impairment is entirely an accounting loss. One can relatively infer that Mgt is relatively conservative on its books.

I am not well versed enough in accounting to know whether PanUnited can take the other option (ie. re-value its existing stake to book an accounting profit with the acqusition).

[AlphaQuant]

This case study involved Pan United paying $100M for an acquisition and and capitalized it at only 30M. And wrote 70M as a "loss".
Is this correct? Who or what accounting rule decides they should capitalize at 30M or 100M? As I recall in accounting, they paid $100M, they should capitalize this on their balance sheet at $100M.

I took a look at the balance sheet from AR 2012 and assumed that the 49.7% of CXP which PanU did not own comprises most of the carrying value of the non-controlling interests of 42.8mio

After the acquisition, the non-controlling interests should drop to 15% and hence simple proportioning means the non-controlling interests should be ard 15/49.7*42.8=13mio.

Since cash has dropped by 100mio, and no debt was involved, then
equity must drop by 100mio.

Since non-controlling int drops by 42.8-13= 30mio, there should be a -70mio under general reserves, attributable to the company owners.

Under Page 44 of the accounting policies:

Transactions with non-controlling interests
Non-controlling interest represents the equity in subsidiaries not attributable, directly or indirectly, to owners of the Company, and are
presented separately in the consolidated statement of comprehensive income and within equity in the consolidated balance sheet,
separately from equity attributable to owners of the Company.
Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity
transactions. In such circumstances, 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 interest is adjusted
and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company.

PS: I'm not an accountant so correct me if wrong.

[specuvestor]

Interested to know also why $70m is not booked as "goodwill" on the asset, or is the fact that it is a subsidiary hindering that due to consolidation rather than purchase method?

[Clement]

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.

[CityFarmer]

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.

[Clement]

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.

In a group b/s, the share capital refers only to the share capital of the parent and treasury stock too. So the transaction cannot be literally similar.

What I meant was, when there is a buyback, the entire owners equity is reduced by the amount of consideration paid. The results of this exercise is similar on the group level.

[zz...]

From its 3Q 2013 report: "As a result of the acquisition, the non-controlling interests have been adjusted accordingly. The difference between the consideration paid and the carry value of the additional interest acquired, amounting to $70.89 million, has been recognised as "Premium paid on acquisition of non-controlling interest" within equity." Looks like they record this as equity deduction instead of good will. NTA of SCDC on 31 Dec 2012 was $69.4m, PUI already owned 54% ($37.48m) before the purchase, looks like the balance $30.1m of $100.98 was also deducted from equity record.

[specuvestor]

Thanks all but more importantly for me is to know whether is this an option/ discretion by directors or a FIXED accounting treatment as Clement said

[Clement]

Thanks all but more importantly for me is to know whether is this an option/ discretion by directors or a FIXED accounting treatment as Clement said

Hi Specuvestor,

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]