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equity under acquisition method

I found two different ways in calculating this:

1. CFAI Mock AM Q46

Total equity = non-controlling interest(40%) + amount paid for 60% interest + acquirer's original capital stock + retained earning

2. CFAI Book, P183, Q26

Total equity = non-controlling interest (50%) + acquirer's original capital stock + retained earning

THE AMOUNT PAID FOR 50% INTEREST IS NOT INCLUDED, WHICH ONE IS CORRECT??

This is messing up my head too. I usually use the first method.

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first one. If you issue new stock/equity to buy this thing then you must include that in your new equity

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Thanks Andrew, so it seems to me:

In case of share purchase, use first one;

In case of cash purchase, use second one, am I right?

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yes. can you find any EOCs or anything that illustrate this?

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cash is coming off the balance sheet to pay for the difference. that reduces shareholders equity. it's cut and dry. if you issue stock, there is no cash paid out.

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I couldn't..so i came ask.

But it totally makes sense:

in a cash offer, ttl assets is reduced by cash paid, and no additional stock is included in SE;

in a stock offer, ttl assets remain unchanged and SE is increased by additional stocks issued.

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To elaborate more on the stock offer:


Total Equity = CS + RE + Amount paid (putting 60% and 40% of amount paid is same as lump sum amount paid) however;

If there is good will :


Total Equity = CS + RE + Amount paid + non controlling interest

Under full goodwill method non control interest = (Amount paid / controlled interest) x non controlling interest

Under Partial Goodwill method non control interest = (FV asset - FV liab) x non controlling interest



Under the cash method with no good will, u just multiply non control interest by amount of $ paid.



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 10:36AM by Bilal.

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Bilal Wrote:
-------------------------------------------------------

>
> Under the cash method with no good will, u just
> multiply non control interest by amount of $ paid.




Sorry, you multiply it by amount of SHE acquired (CS + RE ) x non control interest

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Within this same item set from CFAI AM, #44:

Are you always supposed to subtract the pro rata amortization of the PPE from the investment account if this information is given? That threw me off.

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