In the example in Schweser regarding consolidation of a controlling investment (p 124 book 2) the Equity of the aquiring company remains unchanged. This makes sense as the amount of Equity in the target (which would increase the acquirer’s Equity) is exactly offset by the reduction in cash needed to pay for the target company. What happens if the acquirer pays less than the Equity value of the target? For example, assume a 100% consolidation Target Assets: 100 Target Liabilities: 50 Target Equity: 50 Acquirers Assets: 200 Acquirers Liabilities 100 Acquirers Equity 100 Post Takeover Merged Assets 100 + 200 - 30 (cash paid for target) = 270 Merged Liabilities 50 + 100 = 150 Merged Equity = 280 - 150 = 120 (an increase of 20 from before) In relation to VIEs, when a company sets up a VIE it holds on to a small Equity portion (one of the conditions is that they have voting power etc, share in the gains and losses). Where is this small Equity portion booked on the primary benificiaries balance sheet? Would it be in the investment account? The reason I ask is that when the VIE is consolidated the Equity of the Primary beneficiary also does not change, therefore it must already be on the Primary Benificiares BS. Thanks!
I think the conditions are: sufficient at-risk equity, shareholders have voting rights, shareholders absorb loss, shareholders take gain… And equity shareholders doesn’t have to be the sponsor/primary beneficiary.
If you have sufficient Equity at Risk then you are holding then Equity sureley? Any ideas on the consolidation example above anyone?
What is Equity At Risk?
sufficient at-risk equity do not mean that the sponsor is holding the equity. It just means that equity is at least 10% of total asset of the SPE.
algo-rhythm Wrote: ------------------------------------------------------- > In the example in Schweser regarding consolidation > of a controlling investment (p 124 book 2) the > Equity of the aquiring company remains unchanged. > This makes sense as the amount of Equity in the > target (which would increase the acquirer’s > Equity) is exactly offset by the reduction in cash > needed to pay for the target company. What > happens if the acquirer pays less than the Equity > value of the target? For example, assume a 100% > consolidation > > Target Assets: 100 > Target Liabilities: 50 > Target Equity: 50 > > Acquirers Assets: 200 > Acquirers Liabilities 100 > Acquirers Equity 100 > > Post Takeover > > Merged Assets 100 + 200 - 30 (cash paid for > target) = 270 > Merged Liabilities 50 + 100 = 150 > Merged Equity = 280 - 150 = 120 (an increase of 20 > from before) > > > In relation to VIEs, when a company sets up a VIE > it holds on to a small Equity portion (one of the > conditions is that they have voting power etc, > share in the gains and losses). Where is this > small Equity portion booked on the primary > benificiaries balance sheet? Would it be in the > investment account? The reason I ask is that when > the VIE is consolidated the Equity of the Primary > beneficiary also does not change, therefore it > must already be on the Primary Benificiares BS. > > Thanks! If you take over an entire firm/sub, their equity gets wiped out because you effectively paid them to take a hike. Is this a wholly owned sub? I’m assuming the 20 diff would be put into Minority Interest, but I need to know more info from the question.
Its not a question its an example I made up. I am trying to understand why Equity doesnt chagne when you consolidate either a company or a VIE. If you pay 1bn for a company tha has 10bn assets, your going to have to show it somewhere I imagine. Jus cant find anything anywhere on this!