Hi All, On page 32 (FSA CFAI), the example calculates goodwill. It is: Cost to acquire-BV of acquired company’s net assets-(Fair Value of Inventory-BV of inventory)-(Fair value of PPE- BV of PPE)-BV of long term debt. My question is why do we use the BV but not FV of long term debt here? Thank you!
minocfa please do not confuse yourself with extra formulae like above. Purchase Price: 15 Million Fair Market Value of Net Assets = 7.8 M - 2.4 M = 5.4 M given in the first table on Example 8 – page 30. So Goodwill = 15 - 5.4 = 9.6 Million This is the Purchase Method. So Book Value of Consolidated = BV Of Parent + Fair Value of Acquired Company (Target). So for Inventory - your balance on Consol = 12 for Parent + 3 for Sub=15 Since FV of Sub was 3 and BV was 1.7 ==> an extra 1.3 Mill got assigned to Sub. That is the reconciliation that is being done on the table on page 32. table at the bottom of page 32 also lists debt as 16000 (Parent BV) + 1800 (FV of Sub) =17800. That again is consistent with the Purchase method.
Thank you very much for your answer, CP. I have seen now where 200,000 comes from. It is the difference between BV and FV of long term debt figures of the subsidiary. I have one more question: On page 39, in the income statement, minority interest income is 20% of the income from continuing operations under IFRS. However, it is not under GAAP. Why is that? How do we calculate the income for minority interest under US GAAP? Thank you!
I don’t know if I am correct, but I will try to explain the way I see it. If you look in the table on page 38, you’ll see that the net PP&E differs under IFRS than USGAAP. Under IFRS, the sum of net PP&E of both Parent and Subsidiary from the table on page 37 constitutes the PP&E of the Consolidated company. That is because under IFRS, the FAIR MARKET value is allocated both to the controlling and minority shareholders, so for the consolidated, Net PP&E=235,000 (parent)+80%*155,000 (controlling) + 20%*155,000 (minority)=390,000 Under USGAAP, net PP&E is calculated by adding % control*FAIR MARKET value (80%*fair market value) for the controlling, plus %minority*BOOK VALUE for the minority (that would be 20%*BOOK value), so for the consolidated: Net PP&E=235,000 (parent)+80%*155,000 (controlling) + 20%*95,000 (minority)=378,000 This raises differences when calculating depreciation, which you can see on page 39. The depreciation charged under the IFRS is higher than the one charged under USGAAP, because the total net PP&E under IFRS is higher. Under IFRS, you deduct with 1,200 more than under USGAAP (because the value of PP&E under IFRS is 12,000 higher than the value of PP&E under USGAAP, don’t know exactly how they calculated the value of depreciation, no information is given there). The minority under IFRS represents 20% of the EBIT (you have fair value of PP&E all the way), but minority is 1,200 lower because you charged more for depreciation, add the supplementary depreciation that was charged under IFRS (the 1,200) to the minority interest under IFRS and get the minority under USGAAP, 8,600+1,200=9,600.