Demystifying Financial Consolidation Part V

In the last blog, we have already discussed the theoretical concepts related to purchase method. In this blog, we will see one scenario which will make concepts clear.

Given is the balance sheet (Book Value) of the target company. Since this is the book value balance sheet, we can’t use it for purchase method. We should get the fair value of assets and liabilities.

First table is for the book value of assets and liabilities.

Scenario 1 Purchase Method:

Balance Sheet (Book Value)

As we have already discussed, we won’t consider the goodwill on the Balance sheet of Target Company while valuing it. So in the below Balance sheet we have not considered Goodwill (Existing) Entry.

There are some intangible items which might not be present in the Book value balance sheet, but we need to consider them when valuing Target Company like Brand Value. We can see in the below balance sheet that we have considered fair value of Brand = 100.

Liabilities are also revalued if there is change in the interest rates in the market. But in most of the cases, the adjustment won’t be big.

Balance Sheet (Fair Value)

Goodwill Calculation:

Consideration Paid: 1600

Company Valued at net asset: 1390

Goodwill = 210

In the above example, we have made the assumption that the acquirer company has acquired 100 percent stake in the target company, so there is no NCI entry. If the stake acquired would have been between 50 and 100, we would have been required to account for NCI stake.

Accounting Entries in the Acquirer’s company Books

                                                          Dr

A.R                                        240

Inventory                               60

Land                                     1000

Brand Value                           100

Building                                 300

Goodwill                                 210

—————————————————————————-

                                            Cr

C.L.                                       200

Bonds                                    100

Premium on Bonds                  10

Cash                                      1600