Adjustments when ParentCo acquires remaining stake in an associate?
Hey guys, a quick one - anyone kind enough to help on the below scenario please? Thanks!
AssociateCo has assets $100, liabilities $20, equity $80.
As of last years close, ParentCo owns 40% stake in AssociateCo, i.e. 'investment in associate' BS item worth 40%*$80=$32.
Now ParentCo buys remaining stake (ie. stake worth $48) for say $60, all cash.
Can anyone point me in the right direction on how to make adjustments to the ParentCo statements? In particular, how to adjust the 'investment in associate' BS line item (assume you zero out?), calculate goodwill, calculate new assets, calculate new liabilities, and how to calculate chnages to equity for ParentCo.
If there's limited BS info on AssociateCo (ie. just have the three numbers for A, L, E) then is the best solution to just create a new A line item 'AssociateCo Assets', a new L line item 'AssociateCo Liabilities', a new E line item 'AssociateCo equity'?
Thanks!
I'm sure there is a formal accounting process and CPA bojangles somebody else can speak to, but this is how I would think about it.
Minority Investment Asset = $32 Purchase Price of AssociateCo = $80
(1) ParentCo sells minority investment in AssociateCo. Plus $32 cash, less $32 minority investment asset (2) ParentCo acquires AssociateCo for $60 and finances w/ equity. Less $60 cash.
(3) Because this is a stock sale, you normally keep the existing balance sheet book values for AssociateCo and then just sum up the balance sheets.
(4) You bought the company for $80 and the net book value is $80 so you won't generate any goodwill in this transaction.
(4) If the net book value for AssociateCo were less than the purchsae price, you could do a 338 election. This means it's a deemed asset sale for the seller and they will pay double taxation in a c-corp but you could revalue the assets of the acquired entity up to a maximum of the purchsae price. You can basically allocate stuff however you want (slight exageration maybe) just as long as you don't exceed the purchsae price. If you allocate less than the purchase price, than you generate goodwill.
...Not sure if that answers the question or not. ... the other answer could be: "just add the pre-transaction balance sheets for ParentCo and AssociateCo. Subtract out the cash purchase. Remove the minority investment asset just like you'd sell any other fixed asset (+cash from sale, less the asset sold).
Thanks a lot!
Perhaps I'm misunderstanding... you say in (2) ParentCo acquires AssociateCo for $60, however just want to check a few things. Realise it's the weekend so very kind...
I like the last comment, as really aiming for simplicity! However if you take out the associate investment, then just buy the whole AssociateCo, what purchase price would you use? As they are actually paying a premium for the 60% stake of AssociateCo they didn't own, but don't need to pay any premium for the 40% they already own. The premium they pay for the remaining stake (i.e.paying $60 for the $48 of equity) seems to suggest there'd be some goodwill? Think I'm just really misunderstanding.. thanks again.
Anyone any thoughts? Sorry is a bit urgent! Thanks all!
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