Accounting question that i've come across which has stumped me:
"Acquisition of 80% of a company with %debt and%equity, %tax rate and % interest. What's the effect on the financial statements in years 1, 2 and 3?"
Not included percentages as I saw it on the interview insights, just unsure on how to flow everything through together.
I understand that there would be consolidation and NCI, but not sure if that needs to be mentioned at all.
It's a controlling interest since it's >50% so you'd just handle it like any other M&A and it'd go straight to the parent company's books.
At funding Say it's 50/50 debt/equity CFI - 80 of M&A CFF + 40 debt + 40 equity
BS Cash up 80, debt up 40, equity up 40 Cash down 80, acquired assets up 80
Year 1 Just normal accounting. Say 10 in EBIT from JV, 10% interest on debt, 30% tax rate EBIT = 10 - 4 = 6 * .3 = +4.2 NI
CFO + 4.2 cash
Cash up 4.2, RE up 4.2
Rinse and repeat for years 2 or 3.
Now there's some other M&A accounting items from the PPA that would also have an impact but that's outside the scope of the question.
Thank you so much. I understand there was controlling interest, I wasn't sure if I needed to mention the NCI side on the BS.
With regards to financing on the statements, would the interest repayments just affect the income statement and not touch the other two?
Also, would it be the exact same answer for years 2 and 3? I'd assume so if EBIT is 10.
This is all assuming that you're talking about the acquirer's financial statements and also based off what was given, you're not thinking about PPA yet.
Interest expense is implicit in CFO because it flows through NI so technically it's in the P&L and CFS, but it's only isolated in the P&L.
Yes, before accounting for any other M&A adjustments, that would be how you'd do it.
Perfect, figured I was overcomplicating it by running all other adjustments through my head too.
Somewhat related but if the question involved dividend repayments, that affects CFF right? Pretty sure it'd also reduce SHE through the reduction is retained earnings.
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That's the part I was confused on. I was aware that you'd need to account for goodwill, NCI etc but wasn't sure if either: a) it was outside the scope of the question and b) if it was not, how to flow it all properly for three years.
I said "Now there's some other M&A accounting items from the PPA that would also have an impact but that's outside the scope of the question." Yes, there are all kinds of allocations/adjustments you'd make in an acquisition, adjustments that take months to completely nail down, however given the information that the OP provided, you can't discern what any of those would be.
My line about acquired assets go deleted, you're acquiring net assets of 80 with the 80 that's financed.
There is no NCI for the acquirer, that's only for whoever owns part or all of the 20%.
Word of advice, don't assume things when given an interview question. If you're only given the above, they're not testing you on purchase price allocations, they're testing you on the basics of JV accounting and financing. You can ask for more info but if they don't give it, then you just go with what you have and briefly note that you'd allocate the purchase price which would affect the statements.
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