M&A Accounting Question
Recruiting season is coming up. Just want to see if my understanding of the core of M&A accounting is correct.
From what I understand M&A GAAP accounting (from acquirer's perspective) depends on the following:
1. stock or asset sale
- deferred tax liability reserve in stock sale since assets are not stepped up for tax purposes
-goodwill for stock sale but usually no goodwill for asset sale.
2. ownership (% voting shares acquired, board seats, etc)
- consolidation method (>50% voting): consolidate all balance sheet items and income statement items. create minority interest account on both statements to account for the portion that is not bought
-equity method (20%-50%): create one line on balance sheet, adjust up for acquirer's share of positive earnings of the target, adjust down for dividends paid out, not adjusted to fair value periodically
-cost method - one line created on balance sheet, remains at purchase price. income is recognized when dividends are actually paid out by target.
-available for sale - basically same as cost method but the target is listed and the line item is adjusted periodically on the balance sheet to fair market value.
3. consideration given - issuing stock vs. giving away cash
I am a bit confused about the Equity method vs. the cost and available for sale methods.
Thanks in advance for anyone who can tell me where my understanding is lacking or just plain wrong.
I think this is way too much for summer recruiting.
I'm mainly interested in boutiques and I've heard they are very technical.
Besides, I think this is a better use of my time than reading about interview dress code.
When a company holds stock in another company it is accounted for using either the equity or cost method. You got the basics of the equity method which is used when >20% is owner or the parent can exert "significant influence" on the subsidiary.
Stock that is owned and accounted for using the cost method must be classified as either a trading security or an available-for-sale security. This distinction determines how changes in the market value of the shares affects the holder's financial statements. Either way the investment is reported at fair market value on the holder's balance sheet. An available-for-sale stock will have any unrealized appreciation or depreciation in its value go through other comprehensive income rather than through net income on the income statement. Trading securities have their unrealized appreciation or depreciation go into net income and appear on the income statement. This only matters if the stock has a readily available market price in order to measure the change in value.
Thanks for the clarification. In the case of an asset sale, I assume assets are inherently consolidated regardless of how big a portion of target these assets made up. This is essentially the same as the process for investing in PPE or inventory.
So, the consolidation, equity and cost methods only apply to stock deals?
Yeah you're correct. In an asset acquisition it is like investing in PPE, only with stock do you have to deal with the equity and cost methods.
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