Hi,
under the acquisition method we know that we add together assets and liabilities for both companies. We also add the purchase price to the equity of the acquirer. The residual that makes the BS balance equals minority interest.
my question is - do we never take into account how the actual acquisition is paid for? In the CFA blue boxes the financing is through new issues. But what if we finance through cash? Would we then reduce cash by the purchase price?
Anyone, please confirm that the purchase price is always added to equity, no matter of how the acquisition is financed.
thanks!
My question is linked to CFA curriculum Reading 16 EOC questions 25-30 exhibit 2.
It is not asked to calculate minority interest, but I get a negative minority interest when trying to calculate it…Answer 26 mentions non-controlling interest=320
Purchase price 320 for 50% share, FV=BV so no goodwill.
cash 50 20
receivables 70 45
inventory 130 75
PP&E 1570 930
inv. in company B 320
current liabilities 110 90
LT debt 600 400
common stock 850 535
ret. earnings 580 45
Minority Interest equals $320 because the the full market value of the company is $640, as evidenced by the acquirer paying $320 for 50%. Therefore, the acquirer will show $320 in Minority Interest on Day 1.
Your first paragraph in the original post, at least the last two sentences, are not accurate. Upon acquisition, the acquired assets/liabilities are revalued to Fair Market Value, and any excess is Goodwill. Minority Interest, or Non-controlling Interest as it is now called, represents the portion of the sub’s equity that is not controlled by the Acquiring company. In the above example, all $640 of net assets are on the consolidated balances sheet of the acquirer, and a single line deduction of $320 is the Equity Section as NCI.