Acquisition analysis An acquisition analysis compares the cost of acquisition

Acquisition analysis an acquisition analysis compares

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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
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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
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$ 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)
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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 $3,000 was recorded in the notes to Lotech’s financial statements The tax rate is 30%
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$ 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
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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
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Worksheet entries for consolidation at acquisition date Topic 5
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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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