Acquisition analysis • An acquisition analysis compares the cost of acquisition with the fair value of the identifiable net assets and contingent liabilities (FVINA) that exist at acquisition to determine whether there is: – Goodwill on acquisition (where cost > FVINA) – Bargain purchase (where cost < FVINA) • Goodwill is an asset – it represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and recognised Net assets = Assets – Liabilities = Shareholders equity
Acquisition analysis The fair value of the identifiable net assets • The FVINA includes: – All identifiable asset and liabilities of the subsidiary – As well as the fair value of any contingent liabilities the acquiree may have • We commonly determine the FVINA with reference to the equity balances of the subsidiary , rather than the individual asset and liability balances
$ Share capital 300,000 Retained earnings 50,000 Net assets 350,000 Acquisition analysis Lecture example – background information Hitech Ltd acquired all of the issued share capital of Lotech Ltd on 30 June 2016 for a cash consideration of $400,000 At that time the net assets of Lotech Ltd were represented as follows: Book value of identifiable net assets (BVINA)
Acquisition analysis Lecture example – background information When Hitech acquired its investment in Lotech the following information applied: • Land held by Lotech was undervalued by $10,000 • A building held by Lotech was undervalued by $45,000. The building had originally cost $100,000, 2 years ago and was being depreciated at 10% per year • A contingent liability relating to an unsettled legal claim with a fair value of $3,000 was recorded in the notes to Lotech’s financial statements The tax rate is 30%
$ Cost of acquisition 400,00 0 Book value of net assets - Share capital 300,00 0 - Retained earnings 50,000 Total book value of net assets 350,00 0 Fair value adjustments - After tax increase in land 7,000 - After tax increase in building 31,500 - After tax recognition of provision for legal claim (2,100) Total fair value adjustments 36,400 FVINA 386,40 0 % acquired 100% 386,40 0 Acquisition analysis No previously held equity interest 10,000 x (1 – 30%) = 7,000 (3,000) x (1-30%) = (2,100) 45,000 x (1 – 30%) = 31,500
Hitech Ltd paid cash consideration of $360,000 not 400,000 $ Cost of acquisition (assume) 360,000 Book value of net assets - Share capital 300,000 - Retained earnings 50,000 Total book value of net assets 350,000 Fair value (BCVR) adjustments - After tax increase in land 7,000 - After tax increase in building 31,500 - After tax recognition of provision for legal claim (2,100) Total fair value adjustments 36,400 FVINA 386,400 % acquired 100% 386,400 No change Gain on bargain purchase
Worksheet entries for consolidation at acquisition date Topic 5
Worksheet entries at acquisition date Business combination valuation entries • “ Business combination valuation ” adjustments are required: – To increase or decrease subsidiary’s recorded assets and liabilities book values to fair value ; – To recognise previously unrecognised assets (e.g. internally generated intangibles) at fair value; or – To recognise subsidiary’s
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